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EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOOUNTING FIRM - SOLARCITY CORPd229977dex231.htm
EX-10.4 - 2012 EMPLOYEE STOCK PURCHASE PLAN AND FORM OF AGREEMENTS USED THEREUNDER - SOLARCITY CORPd229977dex104.htm
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As filed with the Securities and Exchange Commission on December 4, 2012

Registration No. 333-184317

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

SOLARCITY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Delaware   4931   02-0781046

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer
Identification Number)

3055 Clearview Way

San Mateo, California 94402

(650) 638-1028

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Lyndon R. Rive

Chief Executive Officer

SolarCity Corporation

3055 Clearview Way

San Mateo, California 94402

(650) 638-1028

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Steven V. Bernard

Alexander D. Phillips

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Seth R. Weissman
Phuong Y. Phillips

SolarCity Corporation

3055 Clearview Way

San Mateo, California 94402

(650) 638-1028

 

Thomas J. Ivey

Skadden, Arps, Slate, Meagher & Flom LLP

525 University Avenue

Palo Alto, California 94301

(650) 470-4500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨      Accelerated filer  ¨
Non-accelerated filer x       (Do not check if a smaller reporting company)    Smaller reporting company  ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 4, 2012

10,065,012 Shares

 

LOGO

 

 

This is an initial public offering of SolarCity Corporation’s shares of common stock. We are offering to sell 10,000,000 shares in this offering. The selling stockholders identified in this prospectus are offering to sell an additional 65,012 shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $13.00 and $15.00. We intend to list the common stock on the NASDAQ Global Market under the symbol “SCTY.”

 

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. See “Risk Factors” on page 13 to read about factors you should consider before buying shares of common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds, before expenses, to us

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

To the extent that the underwriters sell more than 10,065,012 shares of common stock, the underwriters have the option to purchase up to an additional 1,509,752 shares of common stock from us at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares against payment in New York, New York on                    , 2012.

 

Goldman, Sachs & Co.   Credit Suisse   BofA Merrill Lynch

 

Needham & Company   Roth Capital Partners

 

 

Prospectus dated                     , 2012.


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     13   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     37   

USE OF PROCEEDS

     38   

DIVIDEND POLICY

     38   

CAPITALIZATION

     39   

DILUTION

     41   

SELECTED CONSOLIDATED FINANCIAL DATA

     43   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47   

BUSINESS

     91   

MANAGEMENT

     111   

EXECUTIVE COMPENSATION

     120   

RELATED PARTY TRANSACTIONS

     130   

PRINCIPAL AND SELLING STOCKHOLDERS

     134   

DESCRIPTION OF CAPITAL STOCK

     137   

SHARES ELIGIBLE FOR FUTURE SALE

     142   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     145   

UNDERWRITING

     149   

EXPERTS

     157   

LEGAL MATTERS

     157   

WHERE YOU CAN FIND MORE INFORMATION

     157   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus and in any free writing prospectus filed with the Securities and Exchange Commission. We, the underwriters and the selling stockholders have not authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We, the underwriters and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who obtain this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

Through and including                     (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. Therefore, you should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes contained elsewhere in this prospectus. Unless the context requires otherwise, the words “we,” “us,” “our” and “SolarCity” refer to SolarCity Corporation and its wholly owned subsidiaries.

SolarCity

Our Vision for Better Energy

We sell renewable energy to our customers at prices below utility rates. Our long-term agreements generate recurring customer payments and position us to provide our growing base of customers with other energy products and services that further lower their energy costs. We call this “Better Energy.”

Overview

The demand for Better Energy is allowing us to install more solar energy systems than any other company in the United States. We believe this significant demand for our energy solutions results from the following value propositions:

 

  Ÿ  

We lower energy costs.    Our customers buy renewable energy from us for less than they currently pay for electricity from utilities with little to no up-front cost. They are also able to lock in their energy costs for the long term and insulate themselves from rising energy costs.

 

  Ÿ  

We build long-term customer relationships.    Most of our customers agree to a 20-year contract term, positioning us to provide them with additional energy-related solutions during this relationship to further lower their energy costs. At the end of the original contract term, we intend to offer our customers renewal contracts.

 

  Ÿ  

We make it easy.    We perform the entire process, from permitting through installation, and make it simple for customers to switch to renewable energy.

 

  Ÿ  

We focus on quality.    Our top priority is to provide value and quality service to our customers. We have assembled a highly skilled team of in-house professionals dedicated to the highest engineering standards, overall quality and customer service.

We currently serve customers in 14 states, and we intend to expand our footprint internationally, operating in every market where distributed solar energy generation is a viable economic alternative to utility generation. We generate revenue from a mix of residential customers, commercial entities such as Walmart, eBay and Intel, and government entities such as the U.S. Military. Since our founding in 2006, we have provided or contracted to provide systems or services on more than 45,000 buildings. In addition, aggregate contractual cash payments that our customers are obligated to pay over the term of our long-term customer agreements have grown at a compounded annual rate of 117% since 2009. We structure these customer agreements as either leases or power purchase agreements. Our lease customers pay a fixed monthly fee with an electricity production guarantee. Our power purchase agreement customers pay a rate based on the amount of electricity the solar energy system actually produces.

 

 

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Our long-term lease and power purchase agreements create high-quality recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives. Our financial strategy is to monetize these assets at the lowest cost of capital. We share the economic benefit of this lower cost of capital with our customers by reducing the price they pay for energy. Historically, we have monetized the assets created by substantially all of our leases and power purchase agreements via investment funds we have formed with fund investors. In general, we contribute the assets to the investment fund and receive upfront cash and retain a residual interest. The allocation among us and the fund investors of the economic benefits as well as the timing of receipt of such economic benefits varies depending on the structure of the investment fund. We use a portion of the cash received from the investment fund to cover our variable and fixed costs associated with installing the related solar energy systems. We invest the excess cash in the growth of our business. In the future, in addition to or in lieu of monetizing the value through investment funds, we may use debt, equity or other financing strategies to fund our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Funds.”

To date, we have raised $1.57 billion through 23 investment funds and related financing facilities established with banks and other large companies such as Credit Suisse, Google, PG&E Corporation and U.S. Bancorp, and we continue to create additional investment funds. Approximately $602 million of the amount we have raised remains available for future deployments. We also have made significant investments in our business infrastructure and personnel to support our growth, and as a result we have incurred substantial net losses over the past five years.

Our long-term energy contracts serve as a gateway for us to engage our residential customers in performing energy efficiency evaluations and energy efficiency upgrades. During an energy efficiency evaluation, our proprietary software enables us to capture, catalog and analyze all of the energy loads in a home to identify the most valuable and actionable solutions to lower energy costs. We then offer to perform the appropriate upgrades to improve the home’s energy efficiency. We also offer energy-related products such as electric vehicle charging stations and proprietary advanced monitoring software, and we are expanding our product portfolio to include additional products such as on-site battery storage solutions. Approximately 21% of our new residential solar energy system customers in 2011 purchased additional energy products or services from us, and as our customers’ energy needs evolve over time, we believe we are well-positioned to be their provider of choice.

Market Opportunity

According to the Energy Information Agency, or EIA, in 2010, total sales of retail electricity in the United States were $368 billion. U.S. retail electricity prices have increased at an average annual rate of 3.4% and 3.2% from 2000 to 2010 for residential and commercial customers, respectively. The average annual rate increase in the states where we operate has been higher. For example, in Hawaii, the average annual rate increases over the past 10 years reached as high as 7.7% and 8.0% for residential and commercial customers, respectively. Despite these increasing U.S. retail electricity prices, U.S. electricity usage has continued to grow over the past 10 years.

Across the United States, many utility customers are paying retail electricity prices at or above our current blended electricity price of 15 cents per kilowatt hour, or kWh. Based on EIA data, in 2010 approximately 340 terawatt hours, or TWh, of the retail electricity sold in the United States was priced, on average, at or above our current blended electricity price. The volume of sales in TWh at or above this rate increased approximately 295% from 2001 to 2010. In dollar terms, 2010 data suggests a U.S. market size of $58 billion at an electricity price at or above 15 cents per kWh. Using historical annual

 

 

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growth rates for residential and commercial retail electricity prices for 2000 to 2010 and flat electricity consumption, the implied U.S. market size at or above 15 cents per kWh increases to $170 billion, or 950 TWh, by 2017.

As a result of rising energy prices, the market for energy efficiency solutions is expected to grow significantly. Lawrence Berkeley National Laboratory estimates that energy efficiency services sector spending in the United States will increase more than four-fold from 2008 to 2020, reaching $80 billion under a high-growth scenario and approximately $37 billion under a low-growth scenario. This sector consists primarily of the installation and deployment of energy efficiency products and services, including energy efficiency-related engineering, construction, services, technical support and equipment.

Rising retail electricity prices, coupled with inelastic demand, create a significant and growing market opportunity for lower cost retail energy. SolarCity sells cleaner, cheaper energy than utilities.

Our Approach

We have developed an integrated approach that allows our customers to switch to Better Energy in a simple and cost-efficient manner. The key elements of our integrated approach are:

 

  Ÿ  

Sales.    We have structured our sales organization to efficiently engage prospective customers, from initial interest through customized proposals and, ultimately, signed contracts.

 

  Ÿ  

Financing.    We provide multiple pricing options to our customers to help make renewable, distributed energy affordable.

 

  Ÿ  

Engineering.    We have developed software that simplifies and expedites the custom design process and optimizes the energy production of each solar energy system.

 

  Ÿ  

Installation.    We obtain all necessary building permits and handle the installation of our solar energy systems. By managing these logistics, we make the installation process simple for our customers.

 

  Ÿ  

Monitoring and Maintenance.    Our proprietary monitoring software provides both SolarCity and our customers with a real-time view of their energy generation, consumption and carbon offset through an easy-to-read application available on smartphones and any device with a web browser.

 

  Ÿ  

Complementary Products and Services.    Using our proprietary software, we analyze our customers’ energy usage and identify opportunities for energy efficiency improvements.

Our Strengths

We believe the following strengths enable us to deliver Better Energy:

 

  Ÿ  

Lower cost energy.    We sell energy to our customers at prices below utility rates. Our customers typically achieve a lower overall electricity bill immediately upon installation. As retail utility rates rise, our customers’ savings increase.

 

  Ÿ  

Easy to switch.    By providing the sales, financing, engineering, installation, monitoring and maintenance ourselves, we offer a simple and efficient process to our customers.

 

  Ÿ  

Long-term customer relationships.    Most of our solar energy customers purchase energy from us under 20-year contracts, and we leverage these relationships to offer energy efficiency services tailored to our customers’ needs. In addition, because our solar energy systems have an estimated life of 30 years, we intend to offer our customers renewal contracts at the end of the original contract term.

 

 

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  Ÿ  

Significant size and scale.    We believe that our size and scale provide our customers with confidence in our continuing ability to service their system and guarantee its performance over the duration of their long-term contract.

 

  Ÿ  

Innovative technology.    We continually innovate and develop new technologies to facilitate our growth and to enhance the delivery of our products and services.

 

  Ÿ  

Brand recognition.    Our ability to provide high-quality services, our dedication to best-in-class engineering efforts and our exceptional customer service have helped us establish a recognized and trusted national brand.

 

  Ÿ  

Strong leadership team.    We are led by a strong management team with demonstrated execution capabilities and an ability to adapt to rapidly changing market environments.

Our Strategy

Our goal is to become the largest provider of clean distributed energy in the world. We plan to achieve this disruptive strategy by providing every home and business an alternative to their energy bill that is cleaner and cheaper than their current energy provider. We intend to:

 

  Ÿ  

Rapidly grow our customer base.    We intend to invest significantly in additional sales, marketing and operations personnel and leverage strategic relationships with new and existing industry leaders to further expand our business and customer base.

 

  Ÿ  

Continue to offer lower priced energy.    We plan on reducing costs by continuing to leverage our buying power with our suppliers, developing additional proprietary software to further ensure that our integrated team operates as efficiently as possible, and working with fund investors to develop innovative financing solutions to lower our cost of capital and offer lower-priced energy to our customers.

 

  Ÿ  

Leverage our brand and long-term customer relationships to provide complementary products.    We plan to continue to invest in and develop complementary energy products, software and services, such as energy storage and energy management technologies, to offer further cost-savings to our customers. We also plan to expand our energy efficiency business to our commercial customers.

 

  Ÿ  

Expand into new locations.    We intend to continue to expand into new locations, initially targeting those markets where climate, government regulations and incentives position solar energy as an economically compelling alternative to utilities.

Risk Factors

Our business is subject to many risks and uncertainties, as more fully described under “Risk Factors” and elsewhere in this prospectus. For example, you should be aware of the following before investing in our common stock:

 

  Ÿ  

Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our solar energy systems.

 

  Ÿ  

We rely on net metering and related policies to offer competitive pricing to our customers in some of our key markets.

 

 

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  Ÿ  

Our business currently depends on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits and incentives would adversely impact our business.

 

  Ÿ  

Our business depends in part on the regulatory treatment of third-party owned solar energy systems.

 

  Ÿ  

If the Internal Revenue Service or the U.S. Treasury Department makes additional determinations that the fair market value of our solar energy systems is materially lower than what we have claimed, we may have to pay significant amounts to our investment funds or to our fund investors and such determinations could have a material adverse effect on our business, financial condition and prospects.

 

  Ÿ  

Our ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems through financing arrangements with fund investors.

 

  Ÿ  

A material drop in the retail price of utility-generated electricity or electricity from other energy sources would harm our business, financial condition and results of operations.

Corporate Information

We were incorporated in June 2006 as a Delaware corporation. Our headquarters are located at 3055 Clearview Way, San Mateo, California 94402, and our telephone number is (650) 638-1028. You can access our website at www.solarcity.com. Information contained on our website is not a part of, and is not incorporated into, this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

“SolarCity,” “SolarGuard,” “SolarLease” and “PowerGuide” are our registered trademarks in the United States and, in some cases, in certain other countries. Our other unregistered trademarks and service marks in the United States include: “Better Energy,” “SolarBid,” “SolarStrong” and “SolarWorks.” This prospectus also contains trademarks, service marks and tradenames of other companies.

We are an emerging growth company as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act, and Section 3(a)(80) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Pursuant to Section 102 of the Jumpstart Our Business Startups Act, or JOBS Act, we have provided reduced executive compensation disclosure and have omitted a compensation discussion and analysis from this prospectus. Pursuant to Section 107 of the JOBS Act, we have elected to utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

 

 

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THE OFFERING

 

Common stock offered by us

10,000,000 shares

 

Common stock offered by the selling stockholders

65,012 shares

 

Total common stock offered

10,065,012 shares

 

Common stock outstanding after this offering

71,708,364 shares

 

Option to purchase additional shares

The underwriters have an option to purchase a maximum of 1,509,752 additional shares of common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, technologies or other assets.

 

  We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds.”

 

Reserved share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 704,550 shares of our common stock being offered for sale (or 7% of the shares offered by this prospectus) to certain business associates, friends and family of our executive officers and board of directors through a reserved share program. We will offer these shares to the extent permitted under applicable regulations in the United States and applicable jurisdictions. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Proposed NASDAQ Global Market symbol

SCTY

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 61,708,364 shares of our common stock outstanding as of October 31, 2012, and excludes:

 

  Ÿ  

14,591,691 shares of our common stock issuable upon exercise of outstanding stock options at a weighted-average exercise price of $4.67 per share under our 2007 Stock Plan;

 

  Ÿ  

16,991 shares of common stock issuable upon vesting of restricted stock units under our 2007 Stock Plan;

 

  Ÿ  

1,485,010 shares of our common stock, on an as-converted basis, issuable upon the exercise of outstanding warrants to purchase Series E preferred stock, at a weighted average exercise price of $5.41 per share; and

 

  Ÿ  

10,202,157 shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,902,157 shares of common stock reserved for issuance under our 2007 Stock Plan as of October 31, 2012, 7,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan and 1,300,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, and excluding shares that become available under the 2012 Equity Incentive Plan and 2012 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves each year, as more fully described in “Executive Compensation—Employee Benefit Plans.” The 2012 Equity Incentive Plan and the 2012 Employee Stock Purchase Plan will become available when this offering closes.

Except as otherwise indicated, all information in this prospectus:

 

  Ÿ  

assumes the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 50,441,799 shares of common stock effective upon the closing of this offering, including the net exercise of warrants to purchase our Series F preferred stock into 63,853 shares of common stock, based upon the mid-point of the price range on the cover of this prospectus, the conversion of each share of our existing preferred stock (other than our Series G preferred stock) into one share of common stock and the conversion of all shares of our Series G preferred stock into 8,372,065 shares of common stock (or approximately 2.47 shares of common stock for each share of Series G preferred stock issued), based upon the mid-point of the price range on the cover of this prospectus and the adjustment provisions relating to our Series G preferred stock described in “Description of Capital Stock;”

 

  Ÿ  

assumes the conversion of outstanding, non-expiring preferred stock warrants to common stock warrants effective upon the closing of this offering;

 

  Ÿ  

assumes we will file our amended and restated certificate of incorporation and adopt our amended and restated bylaws immediately prior to the closing of this offering; and

 

  Ÿ  

assumes the underwriters will not exercise their option to purchase additional shares of common stock from us in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

You should read the summary consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus.

We derived the summary consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statements of operations data for the nine months ended September 30, 2011 and 2012 and the unaudited consolidated balance sheet data as of September 30, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on a basis consistent with our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in any future period, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

 

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     Year Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands, except share and per share data)  

Consolidated statements of operations data:

          

Revenue:

          

Operating leases

   $ 3,212      $ 9,684      $ 23,145      $ 16,103      $ 33,584   

Solar energy systems sales

     29,435        22,744        36,406        22,706        69,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     32,647        32,428        59,551        38,809        103,389   

Cost of revenue:

          

Operating leases

     1,911        3,191        5,718        3,289        8,615   

Solar energy systems

     28,971        26,953        41,418        31,415        57,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     30,882        30,144        47,136        34,704        66,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,765        2,284        12,415        4,105        36,850   

Operating expenses:

          

Sales and marketing

     10,914        22,404        42,004        27,246        49,976   

General and administrative

     10,855        19,227        31,664        24,126        31,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,769        41,631        73,668        51,372        81,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (20,004     (39,347     (61,253     (47,267     (45,030

Interest expense, net

     334        4,901        9,272        7,516        14,922   

Other expenses, net

     2,360        2,761        3,097        1,884        17,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (22,698     (47,009     (73,622     (56,667     (77,847

Income tax provision

     (22     (65     (92     (62     (107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (22,720     (47,074     (73,714     (56,729     (77,954

Net income (loss) attributable to noncontrolling interests(1)

     3,507        (8,457     (117,230     (86,172     (16,806
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to stockholders(1)

   $ (26,227   $ (38,617   $ 43,516      $ 29,443      $ (61,148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

          

Basic

   $ (3.13   $ (4.50   $ 0.82      $ 0.58      $ (5.63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (3.13   $ (4.50   $ 0.76      $ 0.53      $ (5.63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

          

Basic

     8,378,590        8,583,772        9,977,646        9,845,324        10,867,584   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     8,378,590        8,583,772        14,523,734        14,144,765        10,867,584   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders(2):

          

Basic

       $ 0.89        $ (0.92
      

 

 

     

 

 

 

Diluted

       $ 0.82        $ (0.92
      

 

 

     

 

 

 

Pro forma weighted average shares outstanding(3):

          

Basic

         50,945,159          59,378,923   
      

 

 

     

 

 

 

Diluted

         55,491,248          59,378,923   
      

 

 

     

 

 

 

 

(1) Under GAAP, we are required to present the impact of a hypothetical liquidation of our joint venture investment funds on our income statement. For a more detailed discussion of this accounting treatment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Net Income (Loss) Attributable to Stockholders.”

 

 

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(2) Pro forma net income (loss) attributable to common stockholders assumes the distribution of a deemed dividend on Series G convertible redeemable preferred stock prior to conversion to common stock, the net exercise of the warrants to purchase Series C and F convertible redeemable preferred stock, based upon the mid-point of the price range on the cover of this prospectus, and the conversion of the Series E convertible redeemable preferred stock warrants into warrants to purchase common stock as occurring at the beginning of the fiscal period. Accordingly, the charge for the change in the fair value of the convertible redeemable preferred stock warrant liability recorded in the fiscal period is reversed because this charge would not have been recorded after the net exercise and conversion. Pro forma basic or diluted net income (loss) per share attributable to common stockholders is calculated by dividing the pro forma net income (loss) attributable to common stockholders by the weighted average basic or diluted pro forma shares of common stock. See Note 22 of the notes to our consolidated financial statements for a description of how we compute basic and diluted earnings per share attributable to common stockholders and pro forma basic and diluted earnings per share attributable to common stockholders.
(3) Pro forma weighted average shares outstanding have been calculated assuming the conversion of all outstanding shares of our preferred stock upon the completion of this offering into (i) 42,060,393 shares of our common stock as of December 31, 2011, including the net exercise of warrants to purchase Series C and Series F convertible redeemable preferred stock into 167,347 shares of common stock and (ii) 50,441,799 shares of our common stock as of September 30, 2012, including the net exercise of warrants to purchase Series F convertible redeemable preferred stock into 63,853 shares of common stock, in each case based upon the mid-point of the price range on the cover of this prospectus.

Our consolidated balance sheet as of September 30, 2012 is presented on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our existing convertible preferred stock (other than our Series G convertible preferred stock) into one share of common stock and the conversion of all shares of our Series G convertible preferred stock into 8,372,065 shares of common stock, based upon the mid-point of the price range on the cover of this prospectus and the adjustment provisions relating to our Series G convertible preferred stock described in “Description of Capital Stock,” immediately prior to the closing of this offering, (ii) the net exercise of outstanding Series C and Series F convertible preferred stock warrants that would otherwise expire upon the completion of this offering, based upon the mid-point of the price range on the cover of this prospectus, and (iii) the reclassification of preferred stock warrant liabilities to additional paid-in capital effective upon the closing of this offering; and

 

  Ÿ  

a pro forma as adjusted basis, giving effect to the pro forma adjustments and our sale of 10,000,000 shares of common stock in this offering, based on an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses we will pay.

 

 

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    As of September 30, 2012  
    Actual     Pro Forma(1)     Pro Forma
As Adjusted(2)(3)
 
          (in thousands)        

Consolidated balance sheet data:

     

Cash and cash equivalents

  $ 49,318      $ 49,318      $ 179,622   

Total current assets

    244,626        244,626        374,930   

Solar energy systems, leased and to be leased – net

    858,746        858,746        858,746   

Total assets

    1,151,171        1,151,171        1,278,121   

Total current liabilities

    214,208        214,208        214,208   

Deferred revenue, net of current portion

    179,584        179,584        179,584   

Lease pass-through financing obligation, net of current portion

    134,988        134,988        134,988   

Sale-leaseback financing obligation, net of current portion

    14,855        14,855        14,855   

Other liabilities

    93,533        93,533        93,533   

Convertible redeemable preferred stock

    208,420                 

Stockholders’ (deficit) equity

    (89,652     139,476        266,426   

Noncontrolling interests in subsidiaries

    34,179        34,179        34,179   

 

(1) The pro forma balance sheet data in the table above assumes (i) the conversion of all outstanding shares of convertible redeemable preferred stock into common stock, (ii) the net exercise of the outstanding Series F convertible redeemable preferred stock warrants, based upon the mid-point of the price range on the cover of this prospectus, and (iii) the reclassification of preferred stock warrant liabilities to additional paid-in capital, effective upon the closing of this offering.
(2) The pro forma as adjusted balance sheet in the table above assumes the pro forma conversions, net exercise and reclassifications described in (1) above plus the sale of 10,000,000 shares of our common stock in this offering and the application of the net proceeds at an initial public offering price of $14.00, the mid-point range set forth in the cover page, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3) Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, would increase or decrease, as applicable, our cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ (deficit) equity by approximately $9.3 million, assuming that the number of shares we offer, as stated on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses we will pay.

Key operating metrics:

We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

         Year Ended December 31,          Nine Months
Ended

September  30,
2012
 
     2009      2010      2011     

New buildings(1)

     2,907         4,832         9,034         23,340   

Buildings (end of period)(1)

     5,866         10,698         19,732         43,072   

Cumulative customers (end of period)(2)

     5,775         10,541         18,384         39,656   

Megawatts booked(3)

     36         92         134         279   

Megawatts deployed(3)

     15         31         72         109   

Cumulative megawatts deployed (end of period)(3)

     27         58         129         239   

Transactions for other energy products and services(4)

     67         400         3,716         10,433   

 

(1) Buildings includes all residential, commercial and government buildings where we have installed or contracted to install a solar energy system, or performed or contracted to perform an energy efficiency evaluation or other energy efficiency services.
(2)

Customers include all residential, commercial and government consumers that use or will use energy generated by a solar energy system that we have sold or contracted to sell to the consumer or that we have installed or contracted to install pursuant to a lease or power purchase agreement. For landlord-tenant structures in which we contract with the landlord or

 

 

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development company, we include each residence as an individual customer. For commercial customers with multiple locations, each location is deemed a customer if we maintain a separate contract for the location.

(3) Megawatts booked represents the aggregate megawatt production capacity of solar energy systems pursuant to customer contracts signed during the applicable period. Megawatts deployed represents the aggregate megawatt production capacity of solar energy systems that have had all required inspections completed during the applicable period. Cumulative megawatts deployed represents the aggregate megawatt production capacity of operating solar energy systems subject to leases and power purchase agreements and solar energy systems we have sold to customers.
(4) Transactions for other energy products and services includes all transactions during the period when we perform or contract to perform a service or provide, install or contract to install a product. It excludes the outright sale or installation of a solar energy system under a lease or power purchase agreement and any related monitoring.

We also track the nominal contracted payments of our leases and power purchase agreements entered into during specific periods and as of specified dates. Nominal contracted payments equal the sum of the cash payments that the customer is obligated to pay over the term of the agreement. When calculating nominal contracted payments, we only include those leases and power purchase agreements that are signed. For a lease, we include the monthly fee and upfront fee as set forth in the lease. As an example, the nominal contracted payments for a 20-year lease with monthly payments of $200 and an upfront payment of $5,000 is $53,000. For a power purchase agreement, we multiply the contract price per kilowatt hour by the estimated annual energy output of the associated solar energy system to determine the nominal contracted payment. The nominal contracted payments of a particular lease or power purchase agreement decline as the payments are received by us or a fund investor. For a more detailed discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”

The following table sets forth, with respect to our leases and power purchase agreements, the aggregate nominal contracted payments of such agreements signed during the period presented and the aggregate nominal contracted payments remaining as of the end of each period presented as of the dates presented:

 

     As of December 31,      As of September 30,
2012
 
     2009      2010      2011     
     (in thousands)  

Aggregate nominal contracted payments (agreements signed during period)

   $ 65,234       $ 183,188       $ 252,752       $ 404,967   

Aggregate nominal contracted payments (remaining as of period end)

   $ 106,204       $ 273,166       $ 485,780       $ 831,810   

 

 

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RISK FACTORS

Investing in our common stock involves a substantial risk of loss. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks occurred, it could materially adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment. See the section entitled “Special Note Regarding Forward-Looking Statements and Industry Data” elsewhere in this prospectus.

Risks Related to our Business

Existing electric utility industry regulations, and changes to regulations, may present technical, regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for our solar energy systems.

Federal, state and local government regulations and policies concerning the electric utility industry, and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing and the interconnection of customer-owned electricity generation. In the United States, governments and utilities continuously modify these regulations and policies. These regulations and policies could deter customers from purchasing renewable energy, including solar energy systems. This could result in a significant reduction in the potential demand for our solar energy systems. For example, utilities commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase our customers’ cost to use our systems and make them less desirable, thereby harming our business, prospects, financial condition and results of operations. In addition, depending on the region, electricity generated by solar energy systems competes most effectively with expensive peak-hour electricity from the electric grid, rather than the less expensive average price of electricity. Modifications to the utilities’ peak hour pricing policies or rate design, such as to a flat rate, would require us to lower the price of our solar energy systems to compete with the price of electricity from the electric grid.

In addition, any changes to government or internal utility regulations and policies that favor electric utilities could reduce our competitiveness and cause a significant reduction in demand for our products and services. For example, certain jurisdictions have proposed assessing fees on customers purchasing energy from solar energy systems and a utility in San Diego, California recently attempted to impose a new charge that would disproportionately impact solar energy system customers who utilize net metering, either of which would increase the cost of energy to those customers and could reduce demand for our solar energy systems. Any similar government or utility policies adopted in the future could reduce demand for our products and services and adversely impact our growth.

We rely on net metering and related policies to offer competitive pricing to our customers in some of our key markets.

Forty-three states have a regulatory policy known as net energy metering, or net metering. Each of the states and Washington, D.C., where we currently serve customers has adopted a net metering policy except for Texas, where certain individual utilities have adopted a policy similar to net metering. Net metering typically allows our customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system in excess of electric load that is exported to the grid. At the end of the billing period, the customer simply pays for the net energy used or receives a credit at the retail rate if more energy is produced than consumed. Utilities operating in states without a net

 

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metering policy may receive solar electricity that is exported to the grid at times when there is no simultaneous energy demand by the customer to utilize the generation onsite without providing any compensation to the customer for this generation. Our ability to sell solar energy systems or the electricity they generate may be adversely impacted by the failure to expand existing limits on the amount of net metering in states that have implemented it, the failure to adopt a net metering policy where it currently is not in place or the imposition of new charges that only or disproportionately impact customers that utilize net metering. Our ability to sell solar energy systems or the electricity they generate also may be adversely impacted by the unavailability of expedited or simplified interconnection for grid-tied solar energy systems or any limitation on the number of customer interconnections or amount of solar energy that utilities are required to allow in their service territory or some part of the grid.

Limits on net metering, interconnection of solar energy systems and other operational policies in key markets could limit the number of solar energy systems installed there. For example, California utilities are currently required to provide net metering to their customers until the total generating capacity of net metered systems exceeds 5% of the utilities’ “aggregate customer peak demand.” This cap on net metering in California was increased to 5% in 2010 as utilities neared the prior cap of 2.5%. If the current net metering caps in California, or other jurisdictions, are reached, future customers will be unable to recognize the cost savings associated with net metering. We substantially rely on net metering when we establish competitive pricing for our prospective customers. The absence of net metering for new customers would greatly limit demand for our solar energy systems.

Our business currently depends on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits and incentives would adversely impact our business.

U.S. federal, state and local government bodies provide incentives to end users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the form of rebates, tax credits and other financial incentives such as system performance payments and payments for renewable energy credits associated with renewable energy generation. We rely on these governmental rebates, tax credits and other financial incentives to lower our cost of capital and to incent fund investors to invest in our funds. These incentives enable us to lower the price we charge customers for energy and for our solar energy systems. However, these incentives may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning.

The federal government currently offers a 30% investment tax credit under Section 48(a)(3) of the Internal Revenue Code, or the Federal ITC, for the installation of certain solar power facilities until December 31, 2016. This credit is due to adjust to 10% in 2017. Solar energy systems that began construction prior to the end of 2011 were eligible to receive a 30% federal cash grant paid by the U.S. Treasury Department under section 1603 of the “American Recovery and Reinvestment Act of 2009,” or the U.S. Treasury grant, in lieu of the Federal ITC. Pursuant to the Budget Control Act of 2011, U.S. Treasury grants apparently will be subject to sequestration beginning in 2013. The U.S. federal government’s Office of Management and Budget, in a report issued in September 2012, outlined the anticipated sequestration, which would result in a 7.6% reduction in spending for the U.S. Treasury grant program, with a resulting decrease in U.S. Treasury grants received by us. In addition, applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives.

Reductions in, or eliminations or expirations of, governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing us to increase the prices of our energy and solar energy systems, and reducing the size of our

 

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addressable market. In addition, this would adversely impact our ability to attract investment partners and to form new investment funds and our ability to offer attractive financing to prospective customers. For the year ended December 31, 2011 and the nine months ended September 30, 2012, more than 90% of new customers chose to enter into financed lease or power purchase agreements rather than buying a solar energy system for cash.

Our business depends in part on the regulatory treatment of third-party owned solar energy systems.

Our leases and power purchase agreements are third-party ownership arrangements. Sales of electricity by third parties face regulatory challenges in some states and jurisdictions. Other challenges pertain to whether third-party owned systems qualify for the same levels of rebates or other non-tax incentives available for customer-owned solar energy systems, whether third-party owned systems are eligible at all for these incentives, and whether third-party owned systems are eligible for net metering and the associated significant cost savings. Reductions in, or eliminations of, this treatment of these third-party arrangements could reduce demand for our systems, adversely impact our access to capital and could cause us to increase the price we charge our customers for energy.

The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a number of significant participants in the rooftop solar energy installation industry, including us. The subpoena we received requires us to deliver certain documents in our possession relating to our participation in the U.S. Treasury grant program. These documents will be delivered to the Office of the Inspector General of the U.S. Department of Treasury, which is investigating the administration and implementation of the U.S. Treasury grant program.

In July 2012, we and other companies with significant market share, and other companies related to the solar industry, received subpoenas from the U.S. Department of Treasury’s Office of the Inspector General to deliver certain documents in our respective possession. In particular, our subpoena requested, among other things, documents dated, created, revised or referred to since January 1, 2007 that relate to our applications for U.S. Treasury grants or communications with certain other solar development companies or certain firms that appraise solar energy property for U.S. Treasury grant application purposes. The Inspector General is working with the Civil Division of the U.S. Department of Justice to investigate the administration and implementation of the U.S. Treasury grant program, including possible misrepresentations concerning the fair market value of the solar power systems submitted for grant under that program made in grant applications by companies in the solar industry, including us. We intend to cooperate fully with the Inspector General and the Department of Justice. We anticipate that at least six months will be required to gather all of the requested documents and provide them to the Inspector General, and at least another year following that for the Inspector General to conclude its review of the materials.

We are not aware of, and have not been made aware of, any specific allegations of misconduct or misrepresentation by us or our officers, directors or employees, and no such assertions have been made by the Inspector General or the Department of Justice. However, if at the conclusion of the investigation the Inspector General concludes that misrepresentations were made, the Department of Justice could decide to bring a civil action to recover amounts it believes were improperly paid to us. If it were successful in asserting this action, we could then be required to pay damages and penalties for any funds received based on such misrepresentations (which, in turn, could require us to make indemnity payments to certain of our fund investors). Such consequences could have a material adverse effect on our business, liquidity, financial condition and prospects. Additionally, the period of time necessary to resolve the investigation is uncertain, and this matter could require significant management and financial resources that could otherwise be devoted to the operation of our business.

 

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The Internal Revenue Service recently notified us that it is conducting an income tax audit of two of our investment funds.

In October of 2012, we were notified that the Internal Revenue Service was commencing income tax audits of two of our investment funds which audit will include a review of the fair market value of the solar power systems submitted for grant under the 1603 Grant Program. If, at the conclusion of the audits currently being conducted, the Internal Revenue Service determines that the valuations were incorrect and that our investment funds received U.S. Treasury grants in excess of the amounts to which they were entitled, we could be subject to tax liabilities, including interest and penalties, and we could be required to make indemnity payments to the fund investors.

If the Internal Revenue Service or the U.S. Treasury Department makes additional determinations that the fair market value of our solar energy systems is materially lower than what we have claimed, we may have to pay significant amounts to our investment funds or to our fund investors and such determinations could have a material adverse effect on our business, financial condition and prospects.

We and our fund investors claim the Federal ITC or the U.S. Treasury grant in amounts based on the fair market value of our solar energy systems. We have obtained independent appraisals to support the fair market values we report for claiming Federal ITCs and U.S. Treasury grants. The Internal Revenue Service and the U.S. Treasury Department review these fair market values. With respect to U.S. Treasury grants, the U.S. Treasury Department reviews the reported fair market value in determining the amount initially awarded, and the Internal Revenue Service and the U.S. Treasury Department may also subsequently audit the fair market value and determine that amounts previously awarded must be repaid to the U.S. Treasury Department. Such audits of a small number of our investment funds are ongoing. With respect to Federal ITCs, the Internal Revenue Service may review the fair market value on audit and determine that the tax credits previously claimed must be reduced. If the fair market value is determined in either of these circumstances to be less than we reported, we may owe the fund or our fund investors an amount equal to this difference, plus any costs and expenses associated with a challenge to that valuation. The U.S. Treasury Department has determined in a small number of instances to award us U.S. Treasury grants for our solar energy systems at a materially lower value than we had established in our appraisals and, as a result, we have been required to pay our fund investors a true-up payment or contribute additional assets to the associated investment funds. For example, in the fourth quarter of 2011, we had discussions with representatives of the U.S. Treasury Department relating to U.S. Treasury grant applications for certain commercial solar energy systems submitted in the third and fourth quarters of 2011 and the appropriate U.S. Treasury grant valuation guidelines for such systems. We were unsuccessful in our attempts to have the U.S. Treasury Department reconsider its valuation for these systems, and while we maintained the accuracy of the contracted value to the investment fund, we elected at that time to receive the lower amounts communicated by the U.S. Treasury Department. Other U.S. Treasury grant applications have been accepted and the U.S. Treasury grant paid in full on the basis of valuations comparable to those projects as to which the U.S. Treasury has determined a significantly lower valuation than that claimed in our U.S. Treasury grant applications. The U.S. Department of Treasury issued valuation guidelines on June 30, 2011, and no grant applications that we have submitted at values below those guidelines have been reduced by the U.S. Treasury Department. If the Internal Revenue Service or the U.S. Treasury Department disagrees now or in the future, as a result of any pending or future audit, the outcome of the Department of Treasury Inspector General investigation or otherwise, with the fair market value of more of our solar energy systems that we have constructed or that we construct in the future, including any systems for which grants have already been paid, and determines we have claimed too high of a fair market value, it could have a material adverse effect on our business, financial condition and prospects. For example, a hypothetical five percent downward adjustment in the fair market value in the approximately $341 million of U.S. Department of Treasury grant applications that we have submitted as of September 30, 2012 would obligate us to repay approximately $17 million to our fund investors.

 

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Our ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems with fund investors who require particular tax and other benefits.

Our solar energy systems have been eligible for Federal ITCs or U.S. Treasury grants, as well as depreciation benefits. We have relied on, and will continue to rely on, financing structures that monetize a substantial portion of those benefits and provide financing for our solar energy systems. With the lapse of the U.S. Treasury grant program, we anticipate that our reliance on these tax-advantaged financing structures will increase substantially. If, for any reason, we were unable to continue to monetize those benefits through these arrangements, we may be unable to provide and maintain solar energy systems for new customers on an economically viable basis.

The availability of this tax-advantaged financing depends upon many factors, including:

 

  Ÿ  

our ability to compete with other renewable energy companies for the limited number of potential fund investors, each of which has limited funds and limited appetite for the tax benefits associated with these financings;

 

  Ÿ  

the state of financial and credit markets;

 

  Ÿ  

changes in the legal or tax risks associated with these financings; and

 

  Ÿ  

non-renewal of these incentives or decreases in the associated benefits.

Under current law, the Federal ITC will be reduced from approximately 30% of the cost of the solar energy systems to approximately 10% for solar energy systems placed in service after December 31, 2016. In addition, U.S. Treasury grants are no longer available for new solar energy systems. Moreover, potential fund investors must remain satisfied that the structures we offer make the tax benefits associated with solar energy systems available to these investors, which depends both on the investors’ assessment of the tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the Internal Revenue Service and the courts could reduce the willingness of fund investors to invest in funds associated with these solar energy system investments. We cannot assure you that this type of financing will be available to us. If, for any reason, we are unable to finance solar energy systems through tax-advantaged structures or if we are unable to realize or monetize depreciation benefits, we may no longer be able to provide solar energy systems to new customers on an economically viable basis. This would have a material adverse effect on our business, financial condition and results of operations.

We need to enter into additional substantial financing arrangements to facilitate our customers’ access to our solar energy systems, and if this financing is not available to us on acceptable terms, if and when needed, our ability to continue to grow our business would be materially adversely impacted.

Our future success depends on our ability to raise capital from third-party fund investors to help finance the deployment of our residential and commercial solar energy systems. In particular, our strategy is to seek to reduce the cost of capital through these arrangements to improve our margins or to offset future reductions in government incentives and to maintain the price competitiveness of our solar energy systems. If we are unable to establish new investment funds when needed, or upon desirable terms, to enable our customers’ access to our solar energy systems with little or no upfront cost, we may be unable to finance installation of our customers’ systems, or our cost of capital could increase, either of which would have a material adverse effect on our business, financial condition and results of operations. To date we have raised capital sufficient to finance installation of our customers’ solar energy systems from a number of financial institutions and other large companies. The contract terms in certain of our investment fund documents condition our ability to draw on investment

 

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commitments from the fund investors, including if an event occurs that could reasonably be expected to have a material adverse effect on the fund or in one case on us. If we do not satisfy such condition due to events related to our business or a specific investment fund or developments in our industry (including related to the Department of Treasury Inspector General investigation) or otherwise, and as a result we are unable to draw on existing commitments, it could have a material adverse effect on our business, liquidity, financial condition and prospects. If any of the financial institutions or large companies that currently invest in our investment funds decide not to invest in future investment funds to finance our solar energy systems due to general market conditions, concerns about our business or prospects, the pendency of the Department of Treasury Inspector General investigation or any other reason, or materially change the terms under which they are willing to provide future financing, we will need to identify new financial institutions and companies to invest in our investment funds and negotiate new financing terms.

In the past, we encountered challenges raising new funds, which caused us to delay deployment of a substantial number of solar energy systems for which we had signed leases or power purchase agreements with customers. For example, in late 2008 and early 2009, as a result of the state of the capital markets, our ability to finance the installation of solar energy systems was limited and resulted in a significant backlog of signed sales orders for solar energy systems. Our future ability to obtain additional financing depends on banks’ and other financing sources’ continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources themselves. For example, we have become aware that one of our financing sources is in the process of selling its tax equity portfolio, including its interest in our investment funds. If we experience higher customer default rates than we currently experience in our existing investment funds or we lower the credit rating requirement for new customers, this could make it more difficult or costly to attract future financing. Solar energy has yet to achieve broad market acceptance and depends on continued support in the form of performance-based incentives, rebates, tax credits and other incentives from federal, state and foreign governments. If this support diminishes, our ability to obtain external financing on acceptable terms, or at all, could be materially adversely affected. In addition, we face competition for these investor funds. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available on less favorable terms than our competitors. Our current financing sources may be inadequate to support the anticipated growth in our business plans. Our inability to secure financing could lead to cancelled projects and could impair our ability to accept new projects and customers. In addition, our borrowing costs could increase, which would have a material adverse effect on our business, financial condition and results of operations.

A material drop in the retail price of utility-generated electricity or electricity from other sources would harm our business, financial condition and results of operations.

We believe that a customer’s decision to buy renewable energy from us is primarily driven by their desire to pay less for electricity. The customer’s decision may also be affected by the cost of other renewable energy sources. Decreases in the retail prices of electricity from the utilities or from other renewable energy sources would harm our ability to offer competitive pricing and could harm our business. The price of electricity from utilities could decrease as a result of:

 

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the construction of a significant number of new power generation plants, including nuclear, coal, natural gas or renewable energy technologies;

 

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the construction of additional electric transmission and distribution lines;

 

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a reduction in the price of natural gas as a result of new drilling techniques or a relaxation of associated regulatory standards;

 

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  Ÿ  

the energy conservation technologies and public initiatives to reduce electricity consumption; and

 

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development of new renewable energy technologies that provide less expensive energy.

A reduction in utility electricity prices would make the purchase of our solar energy systems or the purchase of energy under our lease and power purchase agreements less economically attractive. In addition, a shift in the timing of peak rates for utility-generated electricity to a time of day when solar energy generation is less efficient could make our solar energy system offerings less competitive and reduce demand for our products and services. If the retail price of energy available from utilities were to decrease due to any of these reasons, or others, we would be at a competitive disadvantage, we may be unable to attract new customers and our growth would be limited.

A material drop in the retail price of utility-generated electricity would particularly adversely impact our ability to attract commercial customers.

Commercial customers comprise a significant and growing portion of our business, and the commercial market for energy is particularly sensitive to price changes. Typically, commercial customers pay less for energy from utilities than residential customers. Because the price we are able to charge commercial customers is only slightly lower than their current retail rate, any decline in the retail rate of energy for commercial entities could have a significant impact on our ability to attract commercial customers. We may be unable to offer solar energy systems for the commercial market that produce electricity at rates that are competitive with the price of retail electricity on a non-subsidized basis. If this were to occur, we would be at a competitive disadvantage to other energy providers and may be unable to attract new commercial customers, and our business would be harmed.

Rising interest rates could adversely impact our business.

Changes in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:

 

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rising interest rates would increase our cost of capital; and

 

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rising interest rates may negatively impact our ability to secure financing on favorable terms to facilitate our customers’ purchase of our solar energy systems or energy generated by our solar energy systems.

The majority of our cash flows to date have been from solar energy systems under lease and power purchase agreements that have been monetized under various investment fund structures. One of the components of this monetization is the present value of the payment streams from the customers who enter into these leases and power purchase agreements. If the rate of return required by the fund investor rises as a result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value derived from this monetization. Rising interest rates could harm our business and financial condition.

We have guaranteed a minimum return to be received by an investor in certain of our investment funds and could be adversely affected if we are required to make any payments under those guarantees.

For three of our joint venture investment funds with one investor, with total investments of approximately $86.2 million, we are contractually required to make payments to the investor to ensure the investor achieves a specified minimum internal rate of return in the event of liquidation of the funds or if we purchase the investor’s equity stake in the funds, including following the investor’s exercise of its put

 

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right. For another fund with the same investor, we have guaranteed to make payments to the investor to compensate for payments that the investor would be required to make to a certain third party as a result of the investor not achieving a specified minimum internal rate of return in this fund, assessed annually. In both instances, the amounts of potential future payments under these guarantees depends on the amounts and timing of future distributions to the investor from the funds, the tax benefits that accrue to the investor from the funds’ activities, and the amounts that we would pay to the investor if we purchase the investor’s stake in the funds or the distributions to the investor upon liquidation of the funds. In a fifth fund with the same investor, we have guaranteed to annually distribute a minimum amount. Because of uncertainties associated with estimating the timing and amounts of distributions to the investor and the possibility for and timing of the liquidation of the funds, we cannot determine the potential maximum future payments that we could have to make under these guarantees. We may agree to similar terms in the future if market conditions require it. Any significant payments that we may be required to make under our guarantees could adversely affect our financial condition.

In our lease pass-through investment funds, there is a one-time reset of the lease payments, and we may be obligated, in connection with the resetting of the lease payments at true up, to refund lease prepayments or to contribute additional assets to the extent the system sizes, costs, and timing are not consistent with the initial lease payment model.

In our lease pass-through investment funds, the models used to calculate the lease prepayments will be updated for each fund at a fixed date occurring after placement in service of all solar systems or an agreed upon date (typically within the first year of the applicable lease term) to reflect certain specified conditions as they exist at such date, including the ultimate system size of the equipment that was leased, how much it cost, and when it went into service. As a result of this true up, the lease payments are resized and we may be obligated to refund the investor’s lease prepayments or to contribute additional assets to the fund. Any significant refunds or capital contributions that we may be required to make could adversely affect our financial condition.

We are not currently regulated as a utility under applicable law, but we may be subject to regulation as a utility in the future.

Federal law and most state laws do not currently regulate us as a utility. As a result, we are not subject to the various federal and state standards, restrictions and regulatory requirements applicable to U.S. utilities. In the United States, we obtain federal and state regulatory exemptions by establishing “Qualifying Facility” status with the Federal Energy Regulatory Commission for all of our qualifying solar energy projects. In Canada, we also are generally subject to the regulations of the relevant energy regulatory agencies applicable to all producers of electricity under the relevant feed-in tariff regulations (including the feed-in tariff rates), however we are not currently subject to regulation as a utility. Our business strategy includes the continued development of larger solar energy systems in the future for our commercial and government customers, which has the potential to impact our regulatory position. Any local, state, federal or foreign regulations could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting or otherwise restricting our sale of electricity. If we were subject to the same state, federal or foreign regulatory authorities as utilities in the United States or if new regulatory bodies were established to oversee our business in the United States or in foreign markets, then our operating costs would materially increase.

A failure to hire and retain a sufficient number of employees in key functions would constrain our growth and our ability to timely complete our customers’ projects.

To support our growth, we need to hire, train, deploy, manage and retain a substantial number of skilled employees. In particular, we need to continue to expand and optimize our sales infrastructure to grow our customer base and our business, and we plan to expand our direct sales force. Identifying

 

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and recruiting qualified personnel and training them requires significant time, expense and attention. It can take several months before a new salesperson is fully trained and productive. If we are unable to hire, develop and retain talented sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or grow our business.

To complete current and future customer projects and to continue to grow our customer base, we need to hire a large number of installers in the relevant markets. Competition for qualified personnel in our industry is increasing, particularly for skilled installers and other personnel involved in the installation of solar energy systems and delivery of energy products and services. We also compete with the homebuilding and construction industries for skilled labor. As these industries recover and seek to hire additional workers, our cost of labor may increase. The unionization of our labor force could also increase our labor costs. Shortages of skilled labor could significantly delay a project or otherwise increase our costs. Because our profit on a particular installation is based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins or cover our costs for that project. In addition, because we are headquartered in the San Francisco Bay Area, we compete for a limited pool of technical and engineering resources that requires us to pay wages that are competitive with relatively high regional standards for employees in these fields.

If we cannot meet our hiring, retention and efficiency goals, we may be unable to complete our customers’ projects on time, in an acceptable manner or at all. Any significant failures in this regard would materially impair our growth, reputation, business and financial results. If we are required to pay higher compensation than we anticipate, these greater expenses may also adversely impact our financial results and the growth of our business.

It is difficult to evaluate our business and prospects due to our limited operating history.

Since our formation in 2006, we have focused our efforts primarily on the sales, financing, engineering, installation and monitoring of solar energy systems for residential, commercial and government customers. We launched our energy efficiency line of products and services in mid-2010, and revenue attributable to this line of business has not been material compared to revenue attributable to our solar energy systems. We may be unsuccessful in significantly broadening our customer base through installation of solar energy systems within our current markets or in new markets we may enter. Additionally, we cannot assure you that we will be successful in generating substantial revenue from our new energy efficiency products and services or from any additional energy-related products and services we may introduce in the future. Our limited operating history, combined with the rapidly evolving and competitive nature of our industry, may not provide an adequate basis for you to evaluate our operating and financing results and business prospects. In addition, we only have limited insight into emerging trends that may adversely impact our business, prospects and operating results. As a result, our limited operating history may impair our ability to accurately forecast our future performance.

We have incurred losses and may be unable to achieve or sustain profitability in the future.

We have incurred net losses in the past, and we had an accumulated deficit of $108.3 million as of September 30, 2012. We may incur net losses from operations as we increase our spending to finance the expansion of our operations, expand our installation, engineering, administrative, sales and marketing staffs, and implement internal systems and infrastructure to support our growth. We do not know whether our revenue will grow rapidly enough to absorb these costs, and our limited operating

 

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history makes it difficult to assess the extent of these expenses or their impact on our operating results. Our ability to achieve profitability depends on a number of factors, including:

 

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growing our customer base;

 

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finding investors willing to invest in our investment funds;

 

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maintaining and further lowering our cost of capital;

 

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reducing the cost of components for our solar energy systems; and

 

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reducing our operating costs by optimizing our design and installation processes and supply chain logistics.

Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

We face competition from both traditional energy companies and renewable energy companies.

The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with large utilities. We believe that our primary competitors are the traditional utilities that supply energy to our potential customers. We compete with these utilities primarily based on price, predictability of price, and the ease by which customers can switch to electricity generated by our solar energy systems. If we cannot offer compelling value to our customers based on these factors, then our business will not grow. Utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result of their greater size, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or respond more quickly to evolving industry standards and changes in market conditions than we can. Utilities could also offer other value-added products or services that could help them to compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities’ sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems.

We also compete with solar companies in the downstream value chain of solar energy. For example, we face competition from purely finance driven organizations which then subcontract out the installation of solar energy systems, from installation businesses that seek financing from external parties, from large construction companies and utilities, and increasingly from sophisticated electrical and roofing companies. Some of these competitors specialize in either the residential or commercial solar energy markets, and some may provide energy at lower costs than we do. Many of our competitors also have significant brand name recognition and have extensive knowledge of our target markets. For us to remain competitive, we must distinguish ourselves from our competitors by offering an integrated approach that successfully competes with each level of products and services offered by our competitors at various points in the value chain. If our competitors develop an integrated approach similar to ours including sales, financing, engineering, installation, monitoring and efficiency services, this will reduce our marketplace differentiation.

We also face competition in the energy efficiency evaluation and upgrades market and we expect to face competition in additional markets as we introduce new energy-related products and services. As the solar industry grows and evolves, we will also face new competitors who are not currently in the market. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business and prospects.

 

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If we fail to remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

In connection with the audits of our consolidated financial statements for 2010 and 2011, we identified material weaknesses in our internal control over financial reporting and inventory processes. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses resulted from an aggregation of deficiencies.

The accounting policies associated with our investment funds are complex, which contributed to the material weaknesses in our internal control over financial reporting. With regard to our joint venture partnerships, we initially computed the hypothetical liquidation at book value using the fair value of the assets in these joint ventures rather than the carryover basis, resulting in an adjustment to the net loss attributable to the noncontrolling interests in our 2009 consolidated financial statements. For lease pass-through arrangements, we initially characterized funds received from investors as deferred revenue rather than financing obligations, which resulted in adjustments to our 2010 consolidated financial statements. For a particular sale-leaseback transaction, we did not initially defer the correct amount of gain associated with this arrangement, which was corrected in our 2010 consolidated financial statements. The foregoing resulted in restatements of our 2008, 2009 and 2010 consolidated financial statements. In addition, deficiencies in the design and operation of our internal controls resulted in audit adjustments and delayed our financial statement close process for the years ended December 31, 2010 and 2011. We are implementing policies and processes to remediate these material weaknesses and improve our internal control over financial reporting.

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses, in addition to those discussed above, may have been identified. For so long as we qualify as an “emerging growth company” under the JOBS Act, which may be up to five years following this offering, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of the evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

We have taken numerous steps to address the underlying causes of the control deficiencies referenced above, primarily through the development and implementation of policies, improved processes and documented procedures, and the hiring of additional accounting and finance personnel with technical accounting, inventory accounting and financial reporting experience. If we fail to remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting to meet the demands that will be placed upon us as a public company, we may be unable to accurately report our financial results, or report them within the timeframes required by law or exchange regulations.

We cannot assure you that we will be able to remediate our existing material weaknesses in a timely manner, if at all, or that in the future additional material weaknesses will not exist or otherwise be discovered, a risk that is significantly increased in light of the complexity of our business. If our

 

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efforts to remediate these material weaknesses are not successful or if other deficiencies occur, our ability to accurately and timely report our financial position, results of operations or cash flows could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock by the NASDAQ Global Market, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.

Projects for our significant commercial or government customers involve concentrated project risks that may cause significant changes in our financial results.

During any given financial reporting period, we typically have ongoing significant projects for commercial and governmental customers that represent a significant portion of our potential financial results for such period. For example, Walmart is a significant customer for which we have installed a substantial number of solar energy systems. We also recently announced SolarStrong, our five-year plan to build more than $1 billion in solar energy projects for privatized U.S. military housing communities across the country that we anticipate will involve a significant investment in resources and project management over time and will require additional investment funds to support the project. These larger projects create concentrated operating and financial risks. The effect of recognizing revenue or other financial measures on the sale of a larger project, or the failure to recognize revenue or other financial measures as anticipated in a given reporting period because a project is not yet completed under applicable accounting rules by period end, may materially impact our quarterly or annual financial results. In addition, if construction, warranty or operational issues arise on a larger project, or if the timing of such projects unexpectedly shifts for other reasons, such issues could have a material impact on our financial results. If we are unable to successfully manage these significant projects in multiple markets, including our related internal processes and external construction management, or if we are unable to continue to attract such significant customers and projects in the future, our financial results would be harmed.

We depend on a limited number of suppliers of solar panels and other system components to adequately meet anticipated demand for our solar energy systems. Any shortage, delay or component price change from these suppliers could result in sales and installation delays, cancellations and loss of market share.

We purchase solar panels, inverters and other system components from a limited number of suppliers, making us susceptible to quality issues, shortages and price changes. If we fail to develop, maintain and expand our relationships with these or other suppliers, we may be unable to adequately meet anticipated demand for our solar energy systems, or we may only be able to offer our systems at higher costs or after delays. If one or more of the suppliers that we rely upon to meet anticipated demand ceases or reduces production, we may be unable to quickly identify alternate suppliers or to qualify alternative products on commercially reasonable terms, and we may be unable to satisfy this demand. In particular, there are a limited number of inverter suppliers. Once we design a system for use with a particular inverter, if that type of inverter is not readily available at an anticipated price, we may incur additional delay and expense to redesign the system. There have also been periods of industry-wide shortage of key components, including solar panels, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. Any decline in the exchange rate of the U.S. dollar compared to the functional currency of our component suppliers could increase our component prices. In addition, the U.S. government has imposed tariffs on solar cells manufactured in China. Based on determinations by the U.S. government, the applicable anti-dumping tariff rates range from approximately 8%-239%. To the extent that U.S. market participants experience harm from Chinese pricing practices, an additional tariff of approximately 15%-16% will be applied.

 

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Because we currently purchase solar panels containing cells manufactured outside of China, we currently are not adversely impacted by the tariffs. However, if in the future we purchase solar panels containing cells manufactured in China, our purchase price would reflect the tariff penalties mentioned above. Any of these shortages, delays or price changes could limit our growth, cause cancellations or adversely affect our profitability, and result in loss of market share and damage to our brand.

Our operating results may fluctuate from quarter to quarter, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations, resulting in a severe decline in the price of our common stock.

Our quarterly operating results are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past. However, given that we are an early-stage company operating in a rapidly growing industry, those fluctuations may be masked by our recent growth rates and thus may not be readily apparent from our historical operating results. As such, our past quarterly operating results may not be good indicators of future performance.

In addition to the other risks described in this “Risk Factors” section, the following factors could cause our operating results to fluctuate:

 

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the expiration or initiation of any rebates or incentives;

 

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significant fluctuations in customer demand for our products and services;

 

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our ability to complete installations in a timely manner due to market conditions resulting in inconsistently available financing;

 

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our ability to continue to expand our operations, and the amount and timing of expenditures related to this expansion;

 

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actual or anticipated changes in our growth rate relative to our competitors;

 

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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

 

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changes in our pricing policies or terms or those of our competitors, including utilities; and

 

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actual or anticipated developments in our competitors’ businesses or the competitive landscape.

For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance. In addition, our actual revenue, key operating metrics and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have a severe adverse effect on the trading price of our common stock.

Our business benefits from the declining cost of solar panels, and our financial results would be harmed if this trend reversed or did not continue.

The declining cost of solar panels and the raw materials necessary to manufacture them has been a key driver in the pricing of our solar energy systems and customer adoption of this form of renewable energy. If solar panel and raw materials prices increase or do not continue to decline, our growth could slow and our financial results would suffer. In addition, in the past we have purchased a significant portion of the solar panels used in our solar energy systems from manufacturers based in China, some of whom benefit from favorable foreign regulatory regimes and governmental support, including subsidies. If this support were to decrease or be eliminated, or if tariffs imposed by the U.S. government were to increase the prices of these solar panels, our ability to purchase these products on competitive terms or to access specialized technologies from those countries could be restricted. Any of those events could harm our financial results by requiring us to pay higher prices or to purchase

 

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solar panels or other system components from alternative, higher-priced sources. In addition, the U.S. government has imposed tariffs on solar cells manufactured in China. These tariffs will increase the price of solar panels containing these Chinese-manufactured cells, which may harm our financial results in the event we purchase such panels.

We act as the licensed general contractor for our customers and are subject to risks associated with construction, cost overruns, delays, regulatory compliance and other contingencies, any of which could have a material adverse effect on our business and results of operations.

We are a licensed contractor in every community we service, and we are responsible for every customer installation. For our residential projects, we are the general contractor, construction manager and installer. For our commercial projects, we are the general contractor and construction manager, and we typically rely on licensed subcontractors to install these commercial systems. We may be liable to customers for any damage we cause to their home or facility, belongings or property during the installation of our systems. For example, we frequently penetrate our customers’ roofs during the installation process and may incur liability for the failure to adequately weatherproof such penetrations following the completion of construction. In addition, shortages of skilled subcontractor labor for our commercial projects could significantly delay a project or otherwise increase our costs. Because our profit on a particular installation is based in part on assumptions as to the cost of such project, cost overruns, delays or other execution issues may cause us to not achieve our expected margins or cover our costs for that project.

In addition, the installation of solar energy systems and the evaluation and modification of buildings as part of our energy efficiency business is subject to oversight and regulation in accordance with national, state and local laws and ordinances relating to building codes, safety, environmental protection, utility interconnection and metering, and related matters. It is difficult and costly to track the requirements of every individual authority having jurisdiction over our installations and to design solar energy systems to comply with these varying standards. Any new government regulations or utility policies pertaining to our systems may result in significant additional expenses to us and our customers and, as a result, could cause a significant reduction in demand for our systems.

Compliance with occupational safety and health requirements and best practices can be costly, and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.

The installation of solar energy systems requires our employees to work at heights with complicated and potentially dangerous electrical systems. The evaluation and modification of buildings as part of our energy efficiency business requires our employees to work in locations that may contain potentially dangerous levels of asbestos, lead or mold. We also maintain a fleet of more than 570 vehicles that our employees use in the course of their work. There is substantial risk of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation under the U.S. Occupational Safety and Health Act, or OSHA, and equivalent state laws. Changes to OSHA requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures, or suspend or limit operations. In the past, we have had workplace accidents and received citations from OSHA regulators for alleged safety violations, resulting in fines and operational delays for certain projects. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business.

 

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Problems with product quality or performance may cause us to incur warranty expenses and performance guarantee expenses, may lower the residual value of our solar energy systems and may damage our market reputation and cause our financial results to decline.

Our solar energy system warranties are lengthy. Customers who buy energy from us under leases or power purchase agreements are covered by warranties equal to the length of the term of these agreements—typically 20 years. Depending on the state where they live, customers who purchase our solar energy systems for cash are covered by a warranty up to 10 years in duration. We also make extended warranties available at an additional cost to customers who purchase our solar energy systems for cash. In addition, we provide a pass-through of the inverter and panel manufacturers’ warranties to our customers, which generally range from 5 to 25 years. One of these third-party manufacturers could cease operations and no longer honor these warranties, instead leaving us to fulfill these potential obligations to our customers. For example, Evergreen Solar, Inc., one of our former solar panel suppliers, filed for bankruptcy in August 2011. Further, we provide a performance guarantee with our leased solar energy systems that compensates a customer on an annual basis if their system does not meet the electricity production guarantees set forth in their lease.

Because of the limited operating history of our solar energy systems, we have been required to make assumptions and apply judgments regarding a number of factors, including our anticipated rate of warranty claims, and the durability, performance and reliability of our solar energy systems. We have made these assumptions based on the historic performance of similar systems or on accelerated life cycle testing. Our assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial expense to repair or replace defective solar energy systems in the future or to compensate customers for systems that do not meet their production guarantees. Product failures or operational deficiencies also would reduce our revenue from power purchase agreements because they are dependent on system production. Any widespread product failures or operating deficiencies may damage our market reputation and adversely impact our financial results.

In addition, we amortize costs of our solar energy systems over 30 years, which typically exceeds the period of the component warranties and the corresponding payment streams from our operating lease arrangements with our customers. In addition, we typically bear the cost of removing the solar energy systems at the end of the lease term. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the removal, disposal or recycling of our solar energy systems. Consequently, if the residual value of the systems is less than we expect at the end of the lease, after giving effect to any associated removal and redeployment costs, we may be required to accelerate all or some of the remaining unamortized expenses. This could materially impair our future operating results.

Product liability claims against us could result in adverse publicity and potentially significant monetary damages.

If one of our solar energy systems or other products injured someone we would be exposed to product liability claims. Because solar energy systems and many of our other current and anticipated products are electricity producing devices, it is possible that consumers could be injured by our products, whether by product malfunctions, defects, improper installation or other causes. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. Any product liability claim we face could be expensive to defend and divert management’s attention. The successful assertion of product liability claims against us could result in potentially significant monetary damages that could require us to make significant payments, as well as subject us to adverse publicity, damage our reputation and competitive position. Also, any product liability claims and any adverse outcomes may subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of our systems and other products.

 

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Damage to our brand and reputation would harm our business and results of operations.

We depend significantly on our reputation for high-quality products and services, best-in-class engineering, exceptional customer service and the brand name “SolarCity” to attract new customers and grow our business. If we fail to continue to deliver our solar energy systems and our other energy products and services within the planned timelines, if our products and services do not perform as anticipated or if we damage any of our customers’ properties or cancel projects, our brand and reputation could be significantly impaired. In addition, if we fail to deliver, or fail to continue to deliver, high-quality products and services to our customers through our long-term relationships, our customers will be less likely to purchase future products and services from us, which is a key strategy to achieve our desired growth. We also depend greatly on referrals from existing customers for our growth, in addition to our other marketing efforts. Therefore, our inability to meet or exceed our current customers’ expectations would harm our reputation and growth through referrals.

If we fail to manage our recent and future growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.

We have experienced significant growth in recent periods, and we intend to continue to expand our business significantly within existing markets and in a number of new locations in the future. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. In particular, we will be required to expand, train and manage our growing employee base. Our management will also be required to maintain and expand our relationships with customers, suppliers and other third-parties and attract new customers and suppliers, as well as to manage multiple geographic locations.

In addition, our current and planned operations, personnel, systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new products and services or other operational difficulties. Any failure to effectively manage growth could adversely impact our business and reputation.

We may not be successful in leveraging our customer base to grow our business through sales of other energy products and services.

To date, we have derived substantially all of our revenue and cash receipts from the sale of solar energy systems and the sale of energy under our long-term customer agreements. We launched our energy efficiency line of products and services in mid-2010, and revenue attributable to this line of business has not been material compared to revenue attributable to our solar energy systems. Customer demand for these offerings may be more limited than we anticipate. In addition, several of our other energy products and services, including our battery storage solutions, are in the early stages of testing and development. We may not be successful in completing development of these products as a result of research and development difficulties, technical issues, availability of third-party products or other reasons. Even if we are able to offer these or other additional products and services, we may not successfully generate meaningful customer demand to make these offerings viable. If we fail to deliver these additional products and services, if the costs associated with bringing these additional products and services to market is greater than we anticipate, or if customer demand for these offerings is smaller than we anticipate, our growth will be limited.

 

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Our growth depends in part on the success of our strategic relationships with third parties.

A key component of our growth strategy is to develop or expand our strategic relationships with third parties. For example, we are investing resources in establishing relationships with industry leaders, such as trusted retailers and commercial homebuilders, to generate new customers. Identifying partners and negotiating relationships with them requires significant time and resources. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to grow our business could be impaired. Even if we are able to establish these relationships, we may not be able to execute on our goal of leveraging these relationships to meaningfully expand our business and customer base. This would limit our growth potential and our opportunities to generate significant additional revenue or cash receipts.

The loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy.

We depend on our experienced management team, and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our chief executive officer and co-founder, Lyndon R. Rive, and our chief operations officer, chief technology officer and co-founder, Peter J. Rive. We also depend on our ability to retain and motivate key employees and attract qualified new employees. Neither our founders nor our key employees are bound by employment agreements for any specific term, and we may be unable to replace key members of our management team and key employees in the event we lose their services. Integrating new employees into our management team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.

Our business may be harmed if we fail to properly protect our intellectual property.

We believe that the success of our business depends in part on our proprietary technology, including our software, information, processes and know-how. We rely on trade secret and patent protections to secure our intellectual property rights. We cannot be certain that we have adequately protected or will be able to adequately protect our proprietary technology, that our competitors will not be able to utilize our existing technology or develop similar technology independently, that the claims allowed with respect to any patents held by us will be broad enough to protect our technology or that foreign intellectual property laws will adequately protect our intellectual property rights. Moreover, we cannot be certain that our patents provide us with a competitive advantage. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our consent. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. In the future, some of our products could be alleged to infringe existing patents or other intellectual property of third parties, and we cannot be certain that we will prevail in any intellectual property dispute. In addition, any future litigation required to enforce our patents, to protect our trade secrets or know-how or to defend us or indemnify others against claimed infringement of the rights of others could harm our business, financial condition and results of operations. See, for example, “Business—Legal Proceedings,” discussing the lawsuit that Sunpower Corporation filed against us.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and officers.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the listing requirements of the NASDAQ Global Market and other applicable securities rules and

 

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regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

The production and installation of solar energy systems depends heavily on suitable meteorological conditions. If meteorological conditions are unexpectedly unfavorable, the electricity production from our solar energy systems may be substantially below our expectations and our ability to timely deploy new systems may be adversely impacted.

The energy produced and revenue and cash receipts generated by a solar energy system depend on suitable solar and weather conditions, both of which are beyond our control. Furthermore, components of our systems, such as panels and inverters, could be damaged by severe weather, such as hailstorms or tornadoes. In these circumstances, we generally would be obligated to bear the expense of repairing the damaged solar energy systems that we own. Sustained unfavorable weather also could unexpectedly delay our installation of solar energy systems, leading to increased expenses and decreased revenue and cash receipts in the relevant periods. Weather patterns could change, making it harder to predict the average annual amount of sunlight striking each location where we install. This could make our solar energy systems less economical overall or make individual systems less economical. Any of these events or conditions could harm our business, financial condition and results of operations.

We typically bear the risk of loss and the cost of maintenance and repair on solar systems that are owned or leased by our fund investors.

We typically bear the risk of loss and are generally obligated to cover the cost of maintenance and repair on any solar systems that we sell or lease to our fund investors. At the time we sell or lease a solar system to a fund investor, we enter into a maintenance services agreement where we agree to operate and maintain the system for a fixed fee that is calculated to cover our future expected maintenance costs. If our solar systems require an above-average amount of repairs or if the cost of repairing systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar systems, a majority of which are located in California, are damaged in the event of a natural disaster beyond our control, losses could be excluded, such as earthquake damage, or exceed insurance policy limits, and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. We purchase Property and Business Interruption insurance with industry standard coverage and limits approved by an investor’s third party insurance advisors to hedge against such risk, but such coverage may not cover our losses.

 

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Any unauthorized disclosure or theft of personal information we gather, store and use could harm our reputation and subject us to claims or litigation.

We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information and other housing and energy use information. Unauthorized disclosure of such personal information, whether through breach of our systems by an unauthorized party, employee theft or misuse, or otherwise, could harm our business. If we were subject to an inadvertent disclosure of such personal information, or if a third party were to gain unauthorized access to customer personal information we possess, our operations could be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by our customers. In addition, we could incur significant costs in complying with the multitude of federal, state and local laws regarding the unauthorized disclosure of personal information. Finally, any perceived or actual unauthorized disclosure of such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business.

We may have trouble refinancing our credit facilities or obtaining new financing for our working capital, equipment financing and other needs in the future or complying with the terms of existing credit facilities. If credit facilities are not available to us on acceptable terms, if and when needed, or if we are unable to comply with their terms, our ability to continue to grow our business would be adversely impacted.

We have entered into several secured credit agreements, including a $75.0 million working capital facility that matures in September 2014, a $58.5 million term loan credit facility for the purchase of inventory and working capital needs that matures in August 2013, and a $7.0 million term facility to finance the purchase of vehicles that matures in January 2015. Each facility requires us to comply with certain financial, reporting and other requirements. The timing of our commercial projects and other large projects has on occasion adversely affected our ability to satisfy certain financial covenants under these or prior facilities. While our lenders have given us waivers of certain covenants we have not satisfied in the past, there is no assurance that the lenders will waive or forbear from exercising their remedies with respect to any future defaults that might occur, which also could trigger defaults under our other credit agreements. For example, on April 30, 2012 and May 31, 2012, we did not meet a financial ratio covenant, and on June 30, 2012, we breached a financial covenant related to non-GAAP EBITDA under our prior $25.0 million working capital facility, which also resulted in a default under our $7.0 million vehicle financing facility with the same administrative bank agent. The bank waived these breaches, and in September 2012 we refinanced all amounts borrowed under the $25.0 million facility with the new $75.0 million working capital facility. We believe that the financial and other covenants are generally more favorable to us than those in the prior facility, however we cannot assure you that we will not breach these covenants in the future.

Further, there is no assurance that we will be able to enter into new credit facilities on acceptable terms. If we are unable to satisfy financial covenants and other terms under existing or new facilities or obtain associated waivers or forbearance from our lenders or if we are unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.

In the long term, we intend to expand our international activities, which will subject us to a number of risks.

Our long-term strategic plans include international expansion, and we intend to sell our solar energy products and services in international markets. Risks inherent to international operations include the following:

 

  Ÿ  

inability to work successfully with third parties with local expertise to co-develop international projects;

 

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  Ÿ  

multiple, conflicting and changing laws and regulations, including export and import restrictions, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses;

 

  Ÿ  

changes in general economic and political conditions in the countries where we operate, including changes in government incentives relating to power generation and solar electricity;

 

  Ÿ  

political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions;

 

  Ÿ  

difficulties and costs in recruiting and retaining individuals skilled in international business operations;

 

  Ÿ  

international business practices that may conflict with U.S. customs or legal requirements;

 

  Ÿ  

financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable;

 

  Ÿ  

fluctuations in currency exchange rates relative to the U.S. dollar; and

 

  Ÿ  

inability to obtain, maintain or enforce intellectual property rights, including inability to apply for or register material trademarks in foreign countries.

Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal, and political conditions in these countries. The success of our business will depend, in part, on our ability to succeed in differing legal, regulatory, economic, social and political environments. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.

Risks Related to this Offering

An active, liquid and orderly trading market for our common stock may not develop, our stock price may be volatile, and you may be unable to sell your shares at or above the offering price you paid.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our common stock will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market after the offering closes. The market price of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section and others beyond our control, including:

 

  Ÿ  

addition or loss of significant customers;

 

  Ÿ  

changes in laws or regulations applicable to our industry, products or services;

 

  Ÿ  

additions or departures of key personnel;

 

  Ÿ  

the failure of securities analysts to cover our common stock after this offering;

 

  Ÿ  

actual or anticipated changes in expectations regarding our performance by investors or securities analysts;

 

  Ÿ  

price and volume fluctuations in the overall stock market;

 

  Ÿ  

volatility in the market price and trading volume of companies in our industry or companies that investors consider comparable;

 

  Ÿ  

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

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  Ÿ  

our ability to protect our intellectual property and other proprietary rights;

 

  Ÿ  

sales of our common stock by us or our stockholders;

 

  Ÿ  

the expiration of contractual lock-up agreements;

 

  Ÿ  

litigation involving us, our industry or both;

 

  Ÿ  

major catastrophic events; and

 

  Ÿ  

general economic and market conditions and trends.

Further, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many renewable energy companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of our common stock to decline. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment and may lose some or all of your investment.

In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

As an emerging growth company within the meaning of the Securities Act, we will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

We are an emerging growth company within the meaning of the rules under the Securities Act. We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act, including the additional testing of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting, and we have elected to delay adoption of new or revised accounting standards applicable to public companies. As a result, our stockholders may not have access to certain information they may deem important.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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We could remain an ‘‘emerging growth company’’ for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceed $1 billion, (ii) the date that we become a ‘‘large accelerated filer’’ as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Upon completion of this offering, we will have 71,708,364 outstanding shares of common stock based on the number of shares outstanding as of October 31, 2012 and assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options after October 31, 2012. The 10,065,012 shares sold pursuant to this offering will be immediately tradable without restriction, excluding any shares sold under our reserved share program, which shares will become saleable beginning 181 days after the date of this prospectus. Of the remaining shares:

 

  Ÿ  

no shares will be eligible for sale immediately upon completion of this offering; and

 

  Ÿ  

61,708,364 shares will become eligible for sale, subject to the provisions of Rule 144 or Rule 701, upon the expiration of agreements not to sell such shares entered into between the underwriters and such stockholders beginning 181 days after the date of this prospectus.

We and all of our directors and officers, as well as the selling stockholders, have agreed that we and they will not, without the prior written consent of Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters, during the period ending 180 days after the date of this prospectus:

 

  Ÿ  

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exercisable or exchangeable for our common stock; or

 

  Ÿ  

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock;

whether any transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise. This agreement is subject to certain limited exceptions and extensions described in the section entitled “Underwriting.”

Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters may, in their sole discretion and at any time, release all or any portion of the securities subject to lock-up agreement. After the closing of this offering, we intend to register approximately 24,810,839 shares of common stock that have been reserved for future issuance under our stock incentive plans.

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately

 

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77.0% of the outstanding shares of our common stock after this offering. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might affect the market price of our common stock.

Our management will have broad discretion over the use of the proceeds from this offering and may not apply the proceeds of this offering in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds we receive from this offering and you will be relying on its judgment regarding the application of these proceeds. We expect to use the net proceeds from this offering as described under the heading “Use of Proceeds.” However, management may not apply the net proceeds of this offering in ways that increase the value of your investment.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $9.82 per share based on an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon the exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under these plans or if we otherwise issue additional shares of our common stock. See “Dilution.”

Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by discouraging, delaying or preventing a change of control of our company or changes in our management that the stockholders of our company may believe advantageous. These provisions include:

 

  Ÿ  

establishing a classified board of directors so that not all members of our board of directors are elected at one time;

 

  Ÿ  

authorizing “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

  Ÿ  

limiting the ability of stockholders to call a special stockholder meeting;

 

  Ÿ  

limiting the ability of stockholders to act by written consent;

 

  Ÿ  

providing that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

 

  Ÿ  

establishing advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because we do not expect to pay any dividends for the foreseeable future, investors in this offering may be forced to sell their stock to realize a return on their investment.

We do not anticipate that we will pay any dividends to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends might be restricted by the terms of any indebtedness that we incur in the future. Consequently, you should not rely on dividends to receive a return on your investment. See “Dividend Policy.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, use of proceeds from this offering, introduction of new products, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “might,” “would,” “continue” or the negative of these terms or other comparable terminology. Actual events or results may differ materially from those expressed in these forward-looking statements.

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission, or SEC, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise. Potential investors should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in the “Risk Factors” section and elsewhere in this prospectus could harm our business, prospects, operating results and financial condition.

Some of the industry and market data contained in this prospectus are based on independent industry publications, including September 2010 data from Lawrence Berkeley National Laboratory, February 2012 data from Bloomberg New Energy Finance, November 2011 data from the Energy Information Agency or other publicly available information. This information involves a number of assumptions and limitations. We have not commissioned, nor are we affiliated with, any of the independent industry sources we cite. Although we believe that each source is reliable as of its respective date, we have not independently verified the accuracy or completeness of this information. Our industry is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause actual results to differ materially from those expressed in these publications.

 

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USE OF PROCEEDS

We estimate that the net proceeds we receive in this offering will be approximately $127.0 million, based on an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses we will pay. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) our cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $9.3 million, assuming that the number of shares offered by us, as stated on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses we will pay. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $146.7 million.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares. The selling stockholders include certain of our executive officers. See “Principal and Selling Stockholders.”

We will have broad discretion over the use of the net proceeds in this offering. As of the date of this prospectus, we cannot specify all of the particular uses for the net proceeds from this offering. We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to expand our current business through acquisitions or investments in other complementary strategic businesses, products or technologies. We have no commitments with respect to any acquisitions at this time.

We intend to invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government, pending their use as described above.

Some of the other principal purposes of this offering are to create a public market for our common stock and increase our visibility in the marketplace. A public market for our common stock will facilitate future access to public equity markets and enhance our ability to use our common stock as a means of attracting and retaining key employees and as consideration for acquisitions.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions including compliance with covenants under our credit facilities and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2012:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to (i) the conversion of all outstanding shares of our preferred stock into 50,441,799 shares of common stock immediately prior to the closing of this offering, including the net exercise of outstanding warrants to purchase Series F preferred stock that would otherwise expire upon the completion of this offering into 63,853 shares of common stock, based upon the mid-point of the price range on the cover of this prospectus, (ii) the effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering that, among other things, will increase our authorized number of shares of common stock and will authorize a new class of preferred stock and (iii) the reclassification of preferred stock warrant liabilities to additional paid-in capital effective upon the closing of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to give effect to the pro-forma adjustments and our sale of 10,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses we will pay.

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2012  
     Actual     Pro Forma(1)     Pro Forma,
As  Adjusted(2)(3)
 
    

(in thousands, except

share and per share data)

 

Cash and cash equivalents

   $ 49,318      $ 49,318      $ 179,622   
  

 

 

   

 

 

   

 

 

 

Total debt and capital lease obligations

   $ 136,975      $ 136,975      $ 136,975   

Convertible redeemable preferred stock, $0.0001 par value: 56,733,796 shares authorized and 45,392,867 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     208,420                 

Stockholders’ equity:

      

Common stock, $0.0001 par value: 106,000,000 shares authorized, 11,242,461 shares issued and outstanding, actual; 1,000,000,000 shares authorized, 61,684,260 shares issued and outstanding, pro forma; 1,000,000,000 shares authorized, 71,684,260 shares issued and outstanding, pro forma as adjusted

     1        6        7   

Additional paid-in capital

     18,696        247,819        374,768   

Accumulated deficit

     (108,349     (108,349     (108,349
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (89,652     139,476        266,426   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 255,743      $ 276,451      $ 403,401   
  

 

 

   

 

 

   

 

 

 

 

(1)

The pro forma balance sheet data in the table above assumes (i) the conversion of all outstanding shares of convertible redeemable preferred stock into common stock, (ii) the net exercise of the outstanding Series F convertible preferred stock warrants, based upon the mid-point of the price range on the cover of this prospectus, and (iii) the reclassification of

 

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preferred stock warrant liabilities to additional paid-in capital, effective upon the closing of this offering. The table below sets forth the adjustments made to the actual amounts to determinate the pro forma amounts:

 

     Actual      Adjustment 1     Adjustment 2      Pro Forma  

Cash and cash equivalents

   $ 49,318       $      $       $ 49,318   
  

 

 

    

 

 

   

 

 

    

 

 

 

Convertible redeemable preferred stock

     208,420         (208,420               

Common stock

     1         5                6   

Additional paid-in capital

     18,696         208,415        20,708         247,819   

Adjustment 1 gives effect to the conversion of the outstanding shares of convertible redeemable preferred stock into common stock.

Adjustment 2 gives effect to the reclassification of the convertible redeemable preferred stock warrant liabilities to additional paid-in capital upon conversion of the Series E convertible redeemable preferred stock warrants to common stock warrants and the net exercise of the Series F convertible redeemable preferred stock warrants into common stock.

 

(2) The pro forma as adjusted balance sheet in the table above assumes the pro forma conversions, net exercise and reclassifications described in (1) above plus the sale of 10,000,000 shares of our common stock in this offering and the application of the net proceeds at an initial public offering price of $14.00, the mid-point range set forth in the cover page, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The table below sets forth the adjustments made to the pro forma amounts to determine the pro forma as adjusted amounts:

 

     Pro Forma      Adjustment 1      Adjustment 2     Pro Forma
As Adjusted
 

Cash and cash equivalents

   $ 49,318       $ 130,304              $ 179,622   
  

 

 

    

 

 

    

 

 

   

 

 

 

Convertible redeemable preferred stock

                              

Common stock

     6         1                7   

Additional paid-in capital

     247,819         130,303         (3,354     374,768   

Adjustment 1 gives effect to the issuance of 10,000,000 shares of common stock in this offering and our receipt of the estimated net proceeds, based upon the mid-point of the price range on the cover of this prospectus.

Adjustment 2 gives effect to the reclassification to additional paid-in capital of offering expenses that we had incurred and capitalized as of September 30, 2012.

 

(3) Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, would increase or decrease, respectively, the amount of cash, additional paid-in capital and total capitalization by approximately $9.3 million, assuming the number of shares we offer, as stated on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commission and estimated offering expenses we will pay.

The preceding table is based on the number of shares of our common stock outstanding as of September 30, 2012, and excludes:

 

  Ÿ  

14,729,881 shares of our common stock issuable upon exercise of outstanding stock options at a weighted-average exercise price of $4.69 per share under our 2007 Stock Plan;

 

  Ÿ  

16,991 shares of common stock issuable upon vesting of restricted stock units under our 2007 Stock Plan;

 

  Ÿ  

1,485,010 shares of our common stock, on an as-converted basis, issuable upon the exercise of outstanding warrants to purchase Series E preferred stock at an exercise price of $5.41 per share; and

 

  Ÿ  

10,088,071 shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,788,071 shares of common stock reserved for issuance under our 2007 Stock Plan as of September 30, 2012, 7,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan and 1,300,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, and excluding shares that become available under the 2012 Equity Incentive Plan and 2012 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit Plans.” The 2012 Equity Incentive Plan and the 2012 Employee Stock Purchase Plan will become available when this offering closes.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of September 30, 2012 was $172.9 million, or $2.80 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to our sale of our common stock in this offering at the assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2012 would have been $299.9 million, or $4.18 per share. This represents an immediate increase in net tangible book value of $1.38 per share to our existing stockholders and an immediate dilution of $9.82 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $ 14.00   

Pro forma net tangible book value per share as of September 30, 2012

   $ 2.80      

Increase in actual net tangible book value per share attributable to new investors purchasing shares in this offering

     1.38      
  

 

 

    

Pro forma net tangible book value per share after giving effect this offering

        4.18   
     

 

 

 

Dilution per share to new investors in this offering

      $ 9.82   
     

 

 

 

The following table illustrates the differences between the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering based on an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, and before deducting estimated underwriting discounts and commissions and estimated offering expenses as of September 30, 2012 on a pro forma basis.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    
                 

(in thousands)

       

Existing Stockholders

     61,684,260         86.0   $ 203,400         59.2   $ 3.30   

New Investors

     10,000,000         14.0        140,000         40.8      $ 14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     71,684,260         100   $ 343,400         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their over-allotment option in full, the percentage of shares of common stock held by existing stockholders will decrease to approximately 84.3% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will be increased to 11,509,752, or approximately 15.7% of the total number of shares of our common stock outstanding after this offering.

As of September 30, 2012, there were options outstanding to purchase a total of 14,729,881 shares of common stock at a weighted average exercise price of $4.69 per share and restricted stock units covering a total of 16,991 shares of common stock. To the extent outstanding options and restricted stock units are exercised, there will be further dilution to new investors. For a description of our equity plans, see the section titled “Executive Compensation—Employee Benefit Plans.”

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 61,619,248, or approximately

 

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86.0% of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 10,065,012, or approximately 14.0% of the total shares of common stock outstanding after this offering.

The preceding table is based on the number of shares of our common stock outstanding on a pro forma basis as of September 30, 2012, and excludes:

 

  Ÿ  

14,729,881 shares of our common stock issuable upon exercise of outstanding stock options at a weighted-average exercise price of $4.69 per share under our 2007 Stock Plan;

 

  Ÿ  

16,991 shares of common stock issuable upon vesting of restricted stock units under our 2007 Stock Plan;

 

  Ÿ  

1,485,010 shares of our common stock, on an as-converted basis, issuable upon the exercise of outstanding warrants to purchase Series E preferred stock, at an exercise price of $5.41 per share; and

 

  Ÿ  

10,088,071 shares of common stock reserved for future issuance under our equity-based compensation plans, consisting of 1,788,071 shares of common stock reserved for issuance under our 2007 Stock Plan as of September 30, 2012, 7,000,000 shares of common stock reserved for issuance under our 2012 Equity Incentive Plan and 1,300,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, and excluding shares that become available under the 2012 Equity Incentive Plan and 2012 Employee Stock Purchase Plan pursuant to provisions of these plans that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit Plans.” The 2012 Equity Incentive Plan and the 2012 Employee Stock Purchase Plan will become available when this offering closes.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

The consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements not included in this prospectus. The unaudited consolidated statements of operations data for the nine months ended September 30, 2011 and 2012 and the unaudited consolidated balance sheet data as of September 30, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on a basis consistent with our audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in any future period, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

    Year Ended December 31,     Nine Months
Ended September 30,
 
    2007     2008     2009     2010         2011             2011             2012      
    (in thousands, except share and per share data)  

Consolidated statements of operations data:

             

Revenue:

             

Operating leases

  $      $ 225      $ 3,212      $ 9,684      $ 23,145      $ 16,103      $ 33,584   

Solar energy systems sales

    23,045        31,962        29,435        22,744        36,406        22,706        69,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    23,045        32,187        32,647        32,428        59,551        38,809        103,389   

Cost of revenue:

             

Operating leases

           96        1,911        3,191        5,718        3,289        8,615   

Solar energy systems

    23,164        33,212        28,971        26,953        41,418        31,415        57,924   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    23,164        33,308        30,882        30,144        47,136        34,704        66,539   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (119     (1,121     1,765        2,284        12,415        4,105        36,850   

Operating expenses:

             

Sales and marketing

    1,749        15,295        10,914        22,404        42,004        27,246        49,976   

General and administrative

    9,144        8,484        10,855        19,227        31,664        24,126        31,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

         10,893             23,779             21,769             41,631               73,668        51,372        81,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (11,012     (24,900     (20,004     (39,347     (61,253     (47,267     (45,030

Interest expense, net

    233        214        334        4,901        9,272        7,516        14,922   

Other expenses, net

    (291     1,119        2,360        2,761        3,097        1,884        17,895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (10,954     (26,233     (22,698     (47,009     (73,622     (56,667     (77,847

Income tax provision

                  (22     (65     (92     (62     (107
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (10,954     (26,233     (22,720     (47,074     (73,714     (56,729)        (77,954

Net income (loss) attributable to noncontrolling interests(1)

           (12,272     3,507        (8,457     (117,230     (86,172     (16,806
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to stockholders(1)

  $ (10,954   $ (13,961   $ (26,227   $ (38,617   $ 43,516      $ 29,443      $ (61,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,     Nine Months
Ended September 30,
 
    2007     2008     2009     2010         2011         2011     2012  
    (in thousands, except share and per share data)  

Net income (loss) per share attributable to common stock holders:

             

Basic

  $ (1.36   $ (1.70   $ (3.13   $ (4.50   $ 0.82      $ 0.58      $ (5.63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (1.36   $ (1.70   $ (3.13   $ (4.50   $ 0.76      $ 0.53      $ (5.63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

             

Basic

    8,041,992        8,229,036        8,378,590        8,583,772        9,977,646        9,845,324        10,867,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    8,041,992        8,229,036        8,378,590        8,583,772        14,523,734        14,144,765        10,867,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders(2):

             

Basic

          $ 0.89        $ (0.92
         

 

 

     

 

 

 

Diluted

          $ 0.82        $ (0.92
         

 

 

     

 

 

 

Pro forma weighted average shares outstanding(3):

             

Basic

            50,945,159          59,378,923   
         

 

 

     

 

 

 

Diluted

            55,491,248          59,378,923   
         

 

 

     

 

 

 

 

(1) Under GAAP, we are required to present the impact of a hypothetical liquidation of our joint venture investment funds on our income statement. For a more detailed discussion of this accounting treatment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Net Income (Loss) Attributable to Stockholders.”
(2) Pro forma net income (loss) attributable to common stockholders assumes the distribution of a deemed dividend on Series G convertible redeemable preferred stock prior to conversion to common stock, the net exercise of the warrants to purchase Series C and F convertible redeemable preferred stock, based upon the mid-point of the price range on the cover of this prospectus, and the conversion of the Series E convertible redeemable preferred stock warrants into warrants to purchase common stock as occurring at the beginning of the fiscal period. Accordingly, the charge for the change in the fair value of the convertible redeemable preferred stock warrant liability recorded in the fiscal period is reversed because this charge would not have been recorded after the net exercise and conversion. Pro forma basic or diluted net income (loss) per share attributable to common stockholders is calculated by dividing the pro forma net income (loss) attributable to common stockholders by the weighted average basic or diluted pro forma shares of common stock. See Note 22 of the notes to our consolidated financial statements for a description of how we compute basic and diluted earnings per share attributable to common stockholders and pro forma basic and diluted earnings per share attributable to common stockholders.
(3) Pro forma weighted average shares outstanding have been calculated assuming the conversion of all outstanding shares of our preferred stock upon the completion of this offering into (i) 42,060,393 shares of our common stock as of December 31, 2011, including the net exercise of warrants to purchase Series C and Series F convertible redeemable preferred stock into 167,347 shares of common stock and (ii) 50,441,799 shares of our common stock as of September 30, 2012, including the net exercise of warrants to purchase Series F convertible redeemable preferred stock into 63,853 shares of common stock, in each case based upon the mid-point of the price range on the cover of this prospectus.

 

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     As of December 31,     As of
September 30,
2012
 
         2007             2008             2009             2010             2011        
     (in thousands)  

Consolidated balance sheet data:

            

Cash and cash equivalents

   $ 6,459      $ 27,829      $ 37,912      $ 58,270      $ 50,471      $ 49,318   

Total current assets

     24,395        45,124        69,896        110,432        241,522        244,626   

Solar energy systems, leased and to be leased – net

            27,838        87,583        239,611        535,609        858,746   

Total assets

     27,132        78,800        164,154        371,264        813,173        1,151,171   

Total current liabilities

     10,531        19,539        52,012        81,958        246,886        214,208   

Deferred revenue, net of current portion

            5,645        21,394        40,681        101,359        179,584   

Lease pass-through financing obligation, net of current portion

                          53,097        46,541        134,988   

Sale-leaseback financing obligation, net of current portion

                          15,758        15,144        14,855   

Other liabilities

                   120        15,715        36,314        93,533   

Convertible redeemable preferred stock

     26,234        56,184        80,042        101,446        125,722        208,420   

Stockholders’ deficit

     (11,912     (25,377     (50,736     (87,488     (37,662     (89,652

Noncontrolling interests in subsidiaries

            19,573        56,036        123,514        122,646        34,179   

Key operating metrics:

We regularly review a number of metrics, including the following key operating metrics, to

evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

 

    Year Ended
December 31,
   

Nine Months
Ended 

September 30,
2012

 
    2009     2010     2011    

New buildings(1)

    2,907        4,832        9,034        23,340   

Buildings (end of period)(1)

    5,866        10,698        19,732        43,072   

Cumulative customers (end of period)(2)

    5,775        10,541        18,384        39,656   

Megawatts booked(3)

    36        92        134        279   

Megawatts deployed(3)

    15        31        72        109   

Cumulative megawatts deployed (end of period)(3)

    27        58        129        239   

Transactions for other energy products and services(4)

    67        400        3,716        10,433   

 

(1) Buildings includes all residential, commercial and government buildings where we have installed or contracted to install a solar energy system, or performed or contracted to perform an energy efficiency evaluation or other energy efficiency services.
(2) Customers include all residential, commercial and government consumers that use or will use energy generated by a solar energy system that we have sold or contracted to sell to the consumer or that we have installed or contracted to install pursuant to a lease or power purchase agreement. For landlord-tenant structures in which we contract with the landlord or development company, we include each residence as an individual customer. For commercial customers with multiple locations, each location is deemed a customer if we maintain a separate contract for the location.
(3) Megawatts booked represents the aggregate megawatt production capacity of solar energy systems pursuant to customer contracts signed during the applicable period. Megawatts deployed represents the aggregate megawatt production capacity of solar energy systems that have had all required inspections completed during the applicable period. Cumulative megawatts deployed represents the aggregate megawatt production capacity of operating solar energy systems subject to leases and power purchase agreements and that we have sold to customers.
(4) Transactions for other energy products and services includes all transactions during the period when we perform or contract to perform a service or provide, install or contract to install a product. It excludes the outright sale or installation of a solar energy system under a lease or power purchase agreement and any related monitoring.

 

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We also track the nominal contracted payments of our leases and power purchase agreements entered into during specified periods and as of specified dates. Nominal contracted payments equal the sum of the cash payments that the customer is obligated to pay over the term of the agreement. When calculating nominal contracted payments, we only include those leases and power purchase agreements that are signed. For a lease, we include the monthly fee and upfront fee as set forth in the lease. As an example, the nominal contracted payments for a 20-year lease with monthly payments of $200 and an upfront payment of $5,000 is $53,000. For a power purchase agreement, we multiply the contract price per kilowatt hour by the estimated annual energy output of the associated solar energy system to determine the nominal contracted payment. The nominal contracted payments of a particular lease or power purchase agreement decline as the payments are received by us or a fund investor. For a more detailed discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”

The following table sets forth, with respect to our leases and power purchase agreements, the aggregate nominal contracted payments of such agreements signed during the period presented and the aggregate nominal contracted payments remaining as of the end of each period presented as of the dates presented:

 

    As of December 31,     As of
September 30,
2012
 
    2009     2010     2011    
    (in thousands)  

Aggregate nominal contracted payments (agreements signed during period)

  $ 65,234      $ 183,188      $ 252,752      $ 404,967   

Aggregate nominal contracted payments (remaining as of period end)

  $ 106,204      $ 273,166      $ 485,780      $ 831,810   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

Overview

We integrate the sales, engineering, installation, monitoring, maintenance and financing of our distributed solar energy systems with our energy efficiency products and services. This allows us to offer long-term energy solutions to residential, commercial and government customers. Our customers buy renewable energy from us for less than they currently pay for electricity from utilities with little to no up-front cost. Our long-term contractual arrangements typically generate recurring customer payments and enable our customers to have visibility into their future electricity costs and to minimize their exposure to rising retail electricity rates. Our customer relationships also position us to continue to grow our business through energy efficiency products and services offerings including energy efficiency evaluations, appliance upgrades, energy storage solutions and electric vehicle charging stations.

We offer our customers the option to either purchase and own solar energy systems or to purchase the energy that our solar energy systems produce through various financed arrangements. These financed arrangements include long-term contracts that we structure as leases and power purchase agreements. In both financed structures we install our solar energy system at our customer’s premises and charge the customer a monthly fee for the power that our system produces. In the lease structure, this monthly payment is fixed with a production guarantee. In the power purchase agreement structure, we charge customers a fee per kilowatt hour based on the amount of electricity the solar energy system actually produces. The leases and power purchase agreements are typically for 20 years, and generally when there is no upfront fee the specified fees are subject to annual escalations.

Our solar energy systems serve as a gateway for us to perform energy efficiency evaluations and energy efficiency upgrades for our residential customers. During an energy efficiency evaluation, we capture, catalog and analyze all of the energy loads in the home to specifically identify the most valuable and actionable solutions to lower energy cost. We then offer to perform the appropriate upgrades to improve the home’s energy efficiency. We offer our energy efficiency products and services to our solar energy systems customers and on a stand-alone basis. We launched our energy efficiency business in the second quarter of 2010. To date, revenue attributable to our energy efficiency products and services has not been material compared to revenue attributable to our solar energy systems.

Initially, we only offered our solar energy systems on an outright purchase basis. In mid-2008, we began offering leases and power purchase agreements. Our ability to offer leases and power purchase agreements depends in part on our ability to finance the installation of the solar energy systems by monetizing the resulting customer receivable and related investment tax credits, accelerated tax depreciation and other incentives. In late 2008 and early 2009, as a result of the state of the capital markets, our ability to monetize these assets was limited and resulted in an above-normal backlog of signed sales orders for solar energy systems. By the end of 2009, we had raised sufficient investment funds to return to our target backlog. Currently, the majority of our residential energy customers enter

 

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into leasing arrangements, and the majority of our commercial customers and government organizations enter into power purchase agreements. We expect customers to continue to favor leases and power purchase agreements.

We compete mainly with the retail electricity rate charged by the utilities in the markets we serve, and our strategy is to price the energy we sell slightly below that rate. As a result, the price our customers pay to buy energy from us varies depending on the state where the customer is located and the local utility. The price we charge also depends on customer price sensitivity, the need to offer a compelling financial benefit and the price other solar energy companies charge in the region. Our commercial rates in a given region are also typically lower than our residential rates in that region because utilities’ commercial retail rates are generally lower than their residential retail rates.

We generally recognize revenue from solar energy systems sold to our customers when we install the solar energy system and it passes utility inspection. We account for our leases and power purchase agreements as operating leases. We recognize the revenue these arrangements generate on a straight-line basis over the term for leases, or as we generate and deliver energy for power purchase agreements. We recognize revenue from our energy efficiency business when we complete the services. Substantially all of our revenue is attributable to customers located in the United States.

The amount of operating leases revenue that we recognize in a given period is dependent in part on the amount of energy generated by solar energy systems under power purchase agreements and by systems with energy output performance incentives, which in turn is dependent in part on the amount of sunlight. As a result, operating leases revenue has in the past been impacted by seasonally shorter daylight hours in winter months. As the relative percentage of our revenue attributable to power purchase agreements or performance-based incentives increases, this seasonality may become more significant.

Various state and local agencies offer incentive rebates for the installation and operation of solar energy systems. For solar energy systems we sell, we typically have the customer assign the incentive rebate to us. We record the incentive rebates as a component of proceeds from the system sale. For incentive rebates associated with solar energy systems under leases or power purchase agreements, we initially record the rebate as deferred revenue and recognize the deferred revenue as revenue over the term of the lease or power purchase agreement.

Component materials, third-party appliances and direct labor comprise the substantial majority of the costs of our solar energy systems and energy efficiency products and services. Under U.S. generally accepted accounting principles, or GAAP, the cost of revenue from our leases and power purchase agreements are primarily comprised of the depreciation of the cost of the solar energy systems, which are depreciated over the estimated useful life of 30 years, and the amortization of initial direct costs, which is amortized over the term of the lease or power purchase agreement.

We classify our outstanding preferred stock warrants as a liability on our consolidated balance sheet. These warrants are subject to remeasurement to fair value at each reporting date, with any changes in fair value being recognized as a component of other income or expense, net, in our consolidated statement of operations. When this offering closes, we may record a material non-cash charge or credit in our consolidated statement of operations related to the remeasurement of these warrants. Any warrants that are not exercised and do not expire in connection with the closing of the offering will convert into warrants to purchase common stock. These common stock warrants will not be classified as a liability and accordingly will not be subject to further remeasurement.

We have structured different types of investment funds to implement our asset monetization strategy. One such structure is a joint venture structure where we and our fund investors both

 

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contribute funds or assets into the joint venture. Under GAAP, we are required to present the impact of a hypothetical liquidation of these joint ventures on our income statement. Therefore, after we determine our consolidated net income (loss) for a given period, we are required to allocate a portion of our consolidated net income (loss) to the fund investors in our joint ventures (referred to as the “noncontrolling interests” in our financial statements) and allocate the remainder of the consolidated net income (loss) to our stockholders. These income or loss allocations, reflected on our income statement, can have a significant impact on our reported results of operations. For example, for the year ended December 31, 2011 and the nine months ended September 30, 2012, our consolidated net income (loss) was a loss of $73.7 million and $78.0 million, respectively. However, after applying the required allocations, the net income (loss) attributable to our stockholders was income of $43.5 million and a loss of $61.1 million, respectively. For a more detailed discussion of this accounting treatment, see “—Components of Results of Operations—Net Income (Loss) Attributable to Stockholders.”

Investment Funds

Our long-term lease and power purchase agreements create recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives. Our financial strategy is to monetize these assets at the lowest cost of capital. We share the economic benefit of this lower cost of capital with our customers by lowering the price they pay for energy. Historically, we have monetized the assets created by substantially all of our leases and power purchase agreements via investment funds we have formed with fund investors. We contribute the assets to the investment fund and receive upfront cash and retain a residual interest. We use a portion of the cash received from the investment fund to cover our variable and fixed costs associated with installing the related solar energy systems. Because these recurring customer payments, investment tax credits, accelerated tax depreciation and other incentives are either paid by government agencies or individuals or commercial businesses with high credit scores, and because electricity is a necessity, our fund investors perceive these as high-quality assets with a relatively low loss rate. We invest the excess cash in the growth of our business. In the future, in addition to or in lieu of monetizing the value through investment funds, we may use debt, equity or other financing strategies to fund our operations.

We have established different types of investment funds to implement our asset monetization strategy, including joint ventures, lease pass-through and sale-leaseback structures, any of which may utilize debt that is non-recourse to us. We call these arrangements our investment funds. The allocation of the economic benefits among us and the fund investors and related accounting varies depending on the structure.

Joint Ventures.    Under joint venture structures, we and our fund investors contribute funds into a joint venture. Then, the joint venture acquires solar energy systems from us and leases the solar energy systems to customers. Prior to the fund investor receiving its contractual rate of return, the fund investors receive substantially all of the value attributable to the long-term recurring customer payments, investment tax credits, accelerated tax depreciation and, in some cases, other incentives. After the fund investor receives its contractual rate of return, we receive substantially all of the value attributable to the long-term recurring customer payments and the other incentives.

We have determined that we are the primary beneficiary in these joint venture structures. Accordingly, we consolidate the assets and liabilities and operating results of these joint ventures, including the solar energy systems and lease income, in our consolidated financial statements. We recognize the fund investors’ share of the net assets of the joint ventures as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our statement of equity. Our statement of cash flows reflects cash received from these fund investors as proceeds from investments by noncontrolling interests in subsidiaries. Our statement of cash flows also reflects cash

 

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paid to these fund investors as distributions paid to noncontrolling interests in subsidiaries. We reflect any unpaid distributions to these fund investors as distributions payable to noncontrolling interests in subsidiaries in our consolidated balance sheet.

Lease Pass-Through.    Under lease pass-through structures, we lease solar energy systems to fund investors under a master lease agreement, and these investors in turn sublease the solar energy systems to customers. Depending upon the structure, we receive some or all of the value attributable to the accelerated tax depreciation and other incentives. The fund investors receive the value attributable to the investment tax credits and, for the duration of the lease term, the long-term recurring customer payments. In some cases, the fund investors also receive a portion of the accelerated tax depreciation. After the lease term, we receive the customer payments, if any. We record the solar energy systems on our consolidated balance sheet as plant, property and equipment and recognize lease revenue generated by the systems ratably over the master lease term. The fund investors typically make significant upfront cash payments that we record on our consolidated balance sheet as lease pass-through financing obligations. We reduce these obligations by amounts received by the fund investors from U.S. Treasury Department grants, customer payments and the associated incentive rebates. We in turn recognize the incentive rebates and customer payments as revenue over the customer lease term and amortize U.S. Treasury Department grants as a reduction to depreciation of the associated solar energy systems over the estimated life of these systems.

Sale-Leaseback.    Under sale-leaseback structures, we generate cash through the sale of solar energy systems to our fund investors, and we then lease these systems back from the investors and sublease them to our customers. For the duration of the lease term, we may, for some of the structures, receive the value attributable to the incentives and the long-term recurring customer payments, and we make leaseback payments to the fund investors. The fund investors receive the customer payments after the lease term. They also receive the value attributable to the investment tax credits, accelerated depreciation and other incentives. At the end of the lease term, we have an option to purchase the solar energy systems from the fund investors. Typically, our customers make monthly lease payments that we recognize as revenue over the term of the subleases on a straight-line basis. Depending on the design, size and construction of the individual systems and the leaseback terms, we may recognize a portion of the revenue from the sale of the systems or we may treat the cash received from the sale as financing received from the fund investors and reflect the cash received as a sale-leaseback financing obligation on our consolidated balance sheet.

Key Operating Metrics

We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Buildings

We track the number of residential, commercial and government buildings where we have installed or contracted to install a solar energy system, or performed or contracted to perform an energy efficiency evaluation or other energy efficiency services. We believe that the relationship we establish with building owners, together with energy-related information we obtain about the building, position us to provide the owner with additional energy-related solutions to further lower their energy costs. Our total number of buildings increased 82% from 5,866 as of December 31, 2009 to 10,698 as of December 31, 2010, 84% to 19,732 as of December 31, 2011, and 118% to 43,072 as of September 30, 2012.

 

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Solar Energy System Customers

We define a solar energy system customer as a residential, commercial or government consumer that uses or will use energy generated by a solar energy system that we have sold or contracted to sell to the consumer or that we have installed or contracted to install pursuant to a lease or power purchase agreement. For landlord-tenant structures, such as the Davis-Monthan Air Force Base, in which we contract with the landlord or development company, we maintain a direct relationship with the individual tenants and include each residence as an individual customer. For commercial customers with multiple locations, we consider each location to be a customer if we maintain a separate contract for the location. For example, we view each Walmart store to be an individual customer as we maintain a contractual relationship for the individual store and have a direct relationship with the store manager. We track cumulative solar energy system customers as of the end of a given period as an indicator of our historical growth and as an indicator of our rate of growth from period to period.

The following table sets forth our cumulative solar energy system customers as of the dates presented:

 

     As of December 31,      As of September 30,  
     2009      2010      2011      2011      2012  

Cumulative customers

     5,775         10,541         18,384         15,751         39,656   

Megawatts Booked, Megawatts Deployed and Cumulative Megawatts Deployed

We track the electricity-generating production capacity of our solar energy systems as measured in megawatts. Because the size of solar energy systems varies greatly, we believe that tracking the aggregate megawatt production capacity of the systems is an indicator of the growth rate of our solar energy systems business. We track megawatts booked in a given period as an indicator of sales activity in the period. We track megawatts deployed in a given period as an indicator of asset growth in the period. We track cumulative megawatts deployed as of the end of a given period as an indicator of our historical growth and our future opportunity to provide customers with additional energy-related solutions to further lower their energy costs.

Megawatts booked represents the aggregate megawatt production capacity of solar energy systems pursuant to customer contracts signed during the applicable period. Megawatts deployed represents the aggregate megawatt production capacity of solar energy systems that have had all required inspections completed during the applicable period. Cumulative megawatts deployed represents the aggregate megawatt production capacity of operating solar energy systems subject to leases and power purchase agreements and solar energy systems we have sold to customers. Until we have begun the design process, the customer may terminate these contracts with little or no penalty.

The following sets forth the megawatt production capacity of solar energy systems we have booked or deployed during the period presented and the cumulative megawatts deployed as of the end of each period presented:

 

     Year Ended
December 31,
     Nine Months
Ended September 30,
 
     2009      2010      2011      2011      2012  

Megawatts booked

     36         92         134         101         279   

Megawatts deployed

     15         31         72         50         109   

Cumulative megawatts deployed

     27         58         129         108         239   

Transactions for Other Energy Products and Services

We use the number of transactions for energy products and services other than the installation of solar energy systems as a key operating metric to evaluate our ability to generate incremental sales

 

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from our installed customer base and to expand our business to new customers. Our solar energy systems serve as a gateway for us to perform energy efficiency evaluations and energy efficiency upgrades for our residential customers. We also offer our energy efficiency products and services on a stand-alone basis. Our strategy is to expand our energy efficiency business to our commercial customers and to continue to invest in and develop complementary energy products and services.

Transactions for other energy products and services includes all transactions during the period when we perform or contract to perform a service or provide, install or contract to install a product. It excludes the outright sale or installation of a solar energy system under a lease or power purchase agreement and any related monitoring. For the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2012, we completed 67, 400, 3,716 and 10,433 transactions for other energy products and services, respectively.

Nominal Contracted Payments

Our leases and power purchase agreements create long-term recurring customer payments. We use a portion of the value created by these contracts that we refer to as “nominal contracted payments,” together with the value attributable to investment tax credits, accelerated depreciation, Solar Renewable Energy Credits, performance-based incentives, state tax benefits and rebates, to cover the fixed and variable costs associated with installing solar energy systems.

We track the nominal contracted payments of our leases and power purchase agreements entered into during specific periods and as of specified dates. Nominal contracted payments equal the sum of the cash payments that the customer is obligated to pay over the term of the agreement. When calculating nominal contracted payments, we only include those leases and power purchase agreements that are signed. For a lease, we include the monthly fee and upfront fee as set forth in the lease. As an example, the nominal contracted payments for a 20-year lease with monthly payments of $200 and an upfront payment of $5,000 is $53,000. For a power purchase agreement, we multiply the contract price per kilowatt hour by the estimated annual energy output of the associated solar energy system to determine the nominal contracted payment. The nominal contracted payments of a particular lease or power purchase agreement decline as the payments are received by us or a fund investor. Aggregate nominal contracted payments include leases and power purchase agreements that we have contributed to investment funds. Currently, third-party investors in such investment funds have contractual rights to a portion of these nominal contracted payments.

Nominal contracted payments is a forward-looking number, and we use judgment in developing the assumptions used to calculate it. Those assumptions may not prove to be accurate over time. Underperformance of the solar energy systems, payment defaults by our customers, cancellation of signed contracts or other factors described under the heading “Risk Factors” could cause our actual results to differ materially from our calculation of nominal contracted payments.

The following table sets forth, with respect to our leases and power purchase agreements, the aggregate nominal contracted payments of such agreements signed during the period presented and the aggregate nominal contracted payments remaining as of the end of each period presented as of the dates presented:

 

     As of December 31,      As of
September 30,
2012
 
     2009      2010      2011     
     (in thousands)  

Aggregate nominal contracted payments (agreements signed during period)

   $ 65,234       $ 183,188       $ 252,752       $ 404,967   

Aggregate nominal contracted payments (remaining as of period end)

   $ 106,204       $ 273,166       $ 485,780       $ 831,810   

 

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In addition to the nominal contracted payments, our long-term leases and power purchase agreements provide us with a significant post-contract renewal opportunity. Because our solar energy systems have an estimated life of 30 years, they will continue to have a useful life after the 20-year term of the lease or power purchase agreement. At the end of the original contract term, we intend to offer our customers renewal contracts. The solar energy systems will be already installed on the customer’s building, which facilitates customer acceptance of our renewal offer and results in limited additional costs to us.

Components of Results of Operations

Revenue

Operating leases.    We classify and account for our leases and power purchase agreements as operating leases. We consider the proceeds from solar energy system rebate incentives offered by certain state and local governments to form part of the proceeds from our operating leases. We recognize revenue from our operating leases over the operating lease term either on a straight-line basis over the lease term for lease arrangements or as we generate and sell energy to customers under power purchase agreements. We typically bundle and charge for remote monitoring services as part of the lease or power purchase agreement and recognize the allocated amount as revenue over the term of the monitoring service. The term of our leases and power purchase agreements ranges between 10 and 20 years.

Solar energy systems sales.    Solar energy systems sales is comprised of revenue from the sale of solar energy systems directly to cash paying customers, revenue generated from long-term solar energy system sales contracts and revenue attributable to our energy efficiency products and services. We generally recognize revenue from solar energy systems sold to our customers when we install the solar energy system and it passes utility inspection. We allocate a portion of the proceeds from the sale of the system to the remote monitoring service and recognize the allocated amount as revenue over the monitoring service term. We recognize revenue generated from long-term solar energy system sales contracts on a percentage-of-completion basis, based on the ratio of labor costs incurred to date to total project labor costs. We recognize revenue from our energy efficiency services when we complete the services.

During the year ended December 31, 2011 and the nine months ended September 30, 2012, less than 10% of our solar energy system installations were sales as opposed to operating leases. However, because of our revenue recognition policy, these sales represented 61% and 68%, respectively, of our total revenue for those periods. We expect installations utilizing leases and power purchase agreements to continue to represent the vast majority of our installed systems. As a result, the number of systems sold for cash and delivered in a given financial reporting period will have a disproportionate effect on the total revenue reported for that period.

Cost of Revenue, Gross Profit and Gross Profit Margin

Operating Leases Cost of Revenue.    Operating leases cost of revenue is primarily comprised of the depreciation of the cost of the solar energy systems and the amortization of initial direct costs. The depreciation of the cost of the solar energy systems is reduced by the amortization of any U.S. Treasury Department grant payment in lieu of the energy investment tax credit associated with these systems. Initial direct costs include allocated contract administration costs, sales commissions and customer acquisition referral fees. Contract administration costs include personnel costs, such as salary, bonus, employee benefit costs and stock-based compensation costs. Operating leases cost of revenue also includes direct and allocated costs associated with monitoring services for these systems.

 

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Solar Energy Systems Cost of Revenue.    The substantial majority of solar energy systems cost of revenue consists of the costs of solar energy systems component acquisition and personnel costs associated with system installations. We acquire the significant component parts of the solar energy systems directly from foreign and domestic manufacturers or distributors. Our employees install our residential solar energy systems and we employ project managers and construction managers who oversee the subcontractors that install commercial systems. To a lesser extent, solar energy systems cost of revenue also includes personnel costs associated with performing our energy efficiency services and related materials. Solar energy systems cost of revenue also includes engineering and design costs, estimated warranty costs, freight charges, allocated corporate overhead costs such as facilities costs, vehicle depreciation costs and personnel costs associated with supply chain, logistics, operations management, safety and quality control. Personnel costs include salary, bonus, employee benefit costs and stock-based compensation costs.

We allocate to solar energy systems cost of revenue certain corporate overhead costs that include rental and operating costs for our corporate facilities, information technology costs, travel expenses and certain professional services to cost of solar energy systems, work in process, cost of sales, sales and marketing and general and administrative expenses using the relative proportions of direct payroll costs in each of these functions.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs such as salaries, benefits, bonuses, sales commissions and stock-based compensation as well as advertising, promotional and other marketing related expenses. Sales and marketing expenses also include customer referral fees, allocated corporate overhead costs related to facilities and information technology, travel and professional services. We expect sales and marketing costs to increase significantly in absolute dollars in future periods as we continue to grow our sales headcount and expand our marketing efforts to continue to grow our business.

General and Administrative Expenses

General and administrative expenses include personnel costs such as salaries, bonuses and stock-based compensation and professional fees related to legal, human resources, accounting and structured finance services. General and administrative expenses also include allocated corporate overhead costs related to facilities and information technology, travel and professional services. We anticipate that we will incur additional administrative headcount costs to support the growth in our business, our investment fund arrangements and the additional costs of being a public reporting company.

Other Income and Expenses

Our other income and expenses consist principally of the change in fair value of warrants issued to certain fund investors that allow them, on achievement of certain contractual terms, to acquire our convertible redeemable preferred stock, and interest income and expense.

Change in Fair Value of Warrants.    Change in fair value of warrants to acquire convertible redeemable preferred stock. We account for changes in the fair value of warrants issued to acquire convertible redeemable preferred stock through other income or expenses. The warrants have been classified as liability instruments on the balance sheet. We record any changes in the fair value of these instruments between reporting dates as a component of other income or expense in the income statement.

 

 

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Interest Income and Expense.    Interest income and expense primarily consist of the interest charges associated with our secured credit revolver agreements, long-term debt facilities, financing obligations and capital lease obligations. Our credit revolver and long-term debt facilities are subject to variable interest rates. The interest charge on our financing obligations is fixed at the inception of the related transaction based on the incremental borrowing rate in effect on such date or the effective interest rate in the arrangement giving rise to the obligation. The interest charge on capital lease obligations is fixed at the inception of the related transaction based on the incremental borrowing rate in effect on such date. Interest income and expense also include the amortization of deferred financing costs associated with such secured credit revolvers or long-term debt facilities, partially offset by a nominal amount of interest income generated from our cash holdings in interest-bearing accounts.

Provision for Income Taxes

We are subject to taxation in the United States and Canada. We conduct our business primarily in the United States.

Our effective tax rates differ from the statutory rate primarily due to the valuation allowance on our deferred taxes, state taxes, foreign taxes, joint venture transactions and nondeductible compensation. Our tax expense is primarily composed of the amortization of prepaid tax expense as a result of sales of assets to joint ventures included in our consolidated financial statements.

As of December 31, 2010 and 2011, we had deferred tax assets of approximately $67.4 million and $102.7 million, respectively, and deferred tax liabilities of approximately $28.2 million and $53.0 million, respectively. During these periods, we maintained a net deferred tax asset and booked a valuation allowance against the net deferred tax assets.

Net Income (Loss) Attributable to Stockholders

We determine the net income (loss) attributable to stockholders by deducting from net income (loss) in a period the net income (loss) attributable to noncontrolling interests. The net income (loss) attributable to noncontrolling interests represents the joint venture fund investors’ allocable share in the results of the joint venture investment funds. We have determined that the provisions in the contractual arrangements represent substantive profit sharing arrangements. We have further determined that the appropriate methodology for calculating the noncontrolling interests balances that reflects the substantive profit sharing arrangements is a balance sheet approach using the hypothetical liquidation at book value method, or HLBV method. We therefore use the HLBV method to determine the allocable share of the results of the joint ventures attributable to the fund investors, which we record in the consolidated balance sheets as noncontrolling interests in subsidiaries. The HLBV method determines the fund investors’ allocable share of results of the joint venture by calculating the net change in the investors’ share in the consolidated net assets of the joint venture at the beginning and at the end of a period after adjusting for any transactions with the fund investor such as capital contributions or cash distributions.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flow and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our future financial statements will be affected to the extent that our actual results materially differ from these estimates.

 

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We believe that the assumptions and estimates associated with our principles of consolidation, revenue recognition, property, plant and equipment, warranties, deferred U.S. Treasury Department grant proceeds, stock-based compensation, inventory reserves for excess and obsolescence, income taxes and noncontrolling interests have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant policies, see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

We are an emerging growth company within the meaning of the rules under the Securities Act, and we will utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. In addition, Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.

Principles of Consolidation

Our consolidated financial statements reflect our accounts and operations and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 810, Consolidation, we consolidate any variable interest entity, or VIE, of which we are the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if (1) that party has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This holder is considered the primary beneficiary. We do not consolidate a VIE in which we have a majority ownership interest if we are not considered the primary beneficiary. We have determined that we are the primary beneficiary in all of our VIEs and accordingly consolidate the assets and liabilities of such VIEs in our consolidated financial statements. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

Our customers have the option to either purchase and own solar energy systems, to access solar energy systems through contractual arrangements that we account for as operating leases, or to purchase energy through power purchase agreements. We also offer ongoing monitoring services of the solar energy systems. In certain cases, we have entered into sale-leaseback arrangements with our fund investors. In a sale-leaseback arrangement, fund investors invest in solar energy systems while enabling us to sublease the systems to our customers.

In the second quarter of 2010, we also began to offer energy efficiency products and services aimed at improving residential energy efficiency and lowering overall residential energy costs.

 

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In accordance with ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, and ASC 605-10-S99, Revenue Recognition—Overall—SEC Materials, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collection of the related receivable is reasonably assured. In instances where we have multiple deliverables in a single arrangement, we allocate the arrangement consideration to the various elements in the arrangement. ASC 605-25 requires the allocation of the arrangement consideration to each element to be based on the relative selling price method. ASC 605-25 also provides a hierarchy of selling price determination, starting with vendor-specific objective evidence, or VSOE, of selling price, if available; third-party evidence, or TPE, if available and if VSOE is not available; or the best estimate of selling price, or BESP, if neither VSOE nor TPE is available.

Solar Energy Systems Sales

For solar energy systems sold to customers, we recognize revenue, net of any applicable governmental sales taxes, when we install the solar energy system and it passes utility inspection, provided all other revenue recognition criteria are met. Costs incurred on installations before the systems are completed are included in inventories as work in progress in the consolidated balance sheet. Solar energy systems sold to residential and small scale commercial customers typically take three to five months to install. Revenue attributable to the remote monitoring service is recognized over the period of the associated contract, which is generally 5 to 15 years.

We recognize revenue for solar energy systems constructed for large scale commercial customers according to ASC 605-35, Revenue Recognition, Construction-Type and Production Type Contracts. Revenue is recognized on a percentage-of-completion basis, based on the ratio of labor costs incurred to date to total projected labor costs, provided all other revenue recognition criteria are met. Solar energy systems sold to large-scale commercial customers may take up to six months to install.

Energy Efficiency Products and Services

We recognize revenue attributable to energy efficiency products and services when we complete the services, provided all other revenue recognition criteria are met. Typically, energy efficiency services take one to two months to complete. Energy efficiency products and services are sold on a stand-alone basis or bundled with the sale of solar energy systems or lease or power purchase agreements. When we bundle the sale of energy efficiency products and services with the sale of solar energy systems or lease or power purchase agreements, we allocate revenue to the energy efficiency products and services and the sale, lease or power purchase agreements using the relative selling price method provided by ASU 2009-13. The selling price of the energy efficiency products and services used in the allocation is determined by reference to the prices we charge for the products and services on a stand-alone basis. To date, the revenue generated from energy efficiency products and services has not been material and has been included as a component of solar energy systems sales revenue in the consolidated financial statements.

Operating Leases and Power Purchase Agreements

For solar energy systems under operating leases, we account for the leases in accordance with ASC 840, Leases, under which we are the lessor. We record operating lease revenue from minimum lease payments, including upfront rebates and incentives earned from such systems, on a straight-line basis over the life of the lease term, provided all other revenue recognition criteria are met. For incentives that are earned based on the amount of electricity the system generates, we record revenue as amounts are earned. The difference between the payments received and the revenue recognized is

 

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recorded as deferred revenue on the consolidated balance sheet. Initial direct costs from the origination of solar energy systems leased to customers are capitalized as an element of property, plant and equipment and amortized over the term of the related lease.

For solar energy systems where customers purchase electricity from us under power purchase agreements, we have determined that our power purchase agreements should be accounted for, in substance, as operating leases, pursuant to ASC 840. Revenue is recognized based upon the amount of electricity delivered as determined by remote monitoring equipment at rates specified under the contracts, assuming the other revenue recognition criteria are met. Initial direct costs from the origination of solar energy systems leased to customers are capitalized as an element of property, plant and equipment and amortized over the term of the related power purchase agreement.

Sale-Leaseback

We are a party to sale-leaseback arrangements that provide for the sale of solar energy systems to the fund investor and simultaneous leaseback to us of the systems that we then sublease to our customers. In sale-leaseback arrangements, we first determine whether the solar energy system under the sale-leaseback arrangement is “integral equipment.” We determine a solar energy system to be integral equipment when the cost to remove the system from its existing location exceeds ten percent of the fair value of the solar energy system at the time of its original installation. The cost to remove a system from its existing location includes the cost of shipping and reinstallation of the system at a new site, as well as any diminution in fair value. When the leaseback arrangements expire, we have the option to purchase the solar energy system, and in most cases, the lessor has the option to sell the system back to us, though in some instances the lessor can only sell the system back to us prior to expiration of the arrangement.

For solar energy systems that we have determined to be integral equipment, we have concluded that these rights create a continuing involvement. Therefore, we use the financing method to account for the sale-leaseback of such solar energy systems. Under the financing method, we do not recognize as revenue any of the sale proceeds received from the lessor that contractually constitutes a payment to acquire the solar energy system. Instead, we treat any such sale proceeds received as financing capital to install and deliver the solar energy system and accordingly record the proceeds as a financing obligation in our consolidated balance sheet. We allocate the leaseback payments that we make to the lessor between interest expense and a reduction to the financing obligation. Interest on the financing obligation is calculated using our incremental borrowing rate at the inception of the arrangement on the outstanding financing obligation. We determine our incremental borrowing rate by reference to the interest rates that we would obtain in the financial markets to borrow amounts equal to the financing obligation over a term similar to the master lease term.

For solar energy systems that are not integral equipment, we determine if the leaseback is classified as a capital lease or an operating lease. For leasebacks classified as capital leases, we initially record a capital lease asset and capital lease obligation in our consolidated balance sheet equal to the lower of the present value of our future minimum leaseback payments or the fair value of the solar energy system. For capital leasebacks, we do not recognize any of the revenue but defer the gross profit comprising the net of revenue and cost of sale of the associated solar energy system. For leasebacks classified as operating leases, we recognize a portion of the revenue and the associated cost of sale, and defer the portion of revenue and cost of sale that represents the gross profit that is equal to the present value of the future minimum lease payments over the master leaseback term. For both capital and operating leasebacks, we record the deferred gross profit in our consolidated balance sheet as deferred income and amortize the deferred income over the master lease term as a reduction to the cost of operating lease revenue in our consolidated statement of operations.

 

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Solar Energy Systems, Leased and To Be Leased

We are the operating lessor of the solar energy systems under leases that qualify as operating leases. We account for the leases in accordance with ASC 840, Leases. To determine lease classification, we evaluate the lease terms to determine whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceed 90% of the fair value at lease inception. We utilize periodic appraisals to estimate useful life and fair values at lease inception, and residual values at lease termination. Solar energy systems are stated at cost, less accumulated depreciation and amortization.

Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets as follows:

 

    

Useful Lives

Solar energy systems leased to customers

   30 years

Initial direct costs related to solar energy systems leased to customers

   Lease term (10 to 20 years)

Solar energy systems held for lease to customers are constructed systems pending interconnection with the respective utility and are depreciated as solar energy systems leased to customers when the respective systems have been interconnected and placed in service.

Presentation of cash flows associated with solar energy systems

We disclose cash flows associated with solar energy systems in accordance with ASC 230, Statement of Cash Flows (ASC 230). We determine the appropriate classification of cash payments related to solar energy systems depending on the activity that is likely to be the predominant source of cash flows for the item being paid for. Accordingly we present payments made in a period for costs incurred to install solar energy systems that will be leased to customers, including the payments for cost of the inventory that is utilized in such systems, as investing activities in the statement of cash flows. Payments made for inventory that is utilized for solar energy systems that will be sold to customers are presented as cash flows from operations in the statement of cash flows. We do not track payments for component parts at the individual component part level as they are not unique and can be used in either leased solar energy systems or solar energy systems that are sold to customers. Accordingly, we treat costs of raw material transferred to systems to be leased as if they were paid in the period they are transferred to the systems. During the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2011 and 2012, we paid $81.7 million, $192.4 million, $337.8 million, $249.1 million and $434.9 million, respectively, for solar energy systems. Of these amounts, $61.7 million, $156.5 million, $292.9 million, $201.5 million and $290.4 million have been disclosed as cash payments for leased systems and disclosed as investing activities in the years ended December 31, 2009, 2010 and 2011, and the nine months ended September 30, 2011 and 2012, respectively.

 

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Warranties

We warrant our products for various periods against defects in material or installation workmanship. We generally provide warranties of between 10 to 20 years on the generating and nongenerating parts of the solar energy systems that we sell. The manufacturers’ warranty on the components of the solar energy systems, which we typically pass through to our customers, has a warranty period ranging from 5 to 25 years depending upon the solar energy system component under warranty and the manufacturer. For the years ended December 31, 2010 and 2011, and for the nine months ended September 30, 2012, the changes in accrued warranty balance, recorded as a component of accrued liabilities on our consolidated balance sheets consisted of the following:

 

     Year Ended
December 31,
    Nine Months Ended
September  30,

2012
 
(In thousands)    2010     2011    

Balance—beginning of the period

   $ 1,148      $ 1,704      $ 2,462   

Provision charged to warranty expense

     614        531        1,662   

Assumed obligations arising from business acquisitions

            349          

Less warranty claims

     (58     (122     (149
  

 

 

   

 

 

   

 

 

 

Balance—end of the period

   $ 1,704      $ 2,462      $ 3,975   
  

 

 

   

 

 

   

 

 

 

Solar Energy Performance Guarantees

We guarantee that our leased solar energy systems will generate a minimum level of solar energy output. We monitor the systems to determine whether the solar energy systems are achieving these specified minimum outputs. If we determine that the guaranteed minimum energy output is not achieved, we record a liability for the estimated amounts payable. We believe that the solar energy systems are capable of producing the minimum production outputs guaranteed and therefore do not record any liability in the consolidated financial statements relating to these guarantees.

Deferred U.S. Treasury Department Grant Proceeds

We have determined that all of our solar energy systems constitute eligible property as defined under Section 1603 of the American Recovery and Reinvestment Act of 2009, as amended by the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of December 2010. We submit applications for grants receivable from the U.S. Treasury Department related to eligible property based on 30% of the tax basis of the solar energy systems as supported by independently appraised fair market values of the systems or guideline system values that have been posted by the U.S. Treasury Department on its website. To determine the fair market value of the systems, an independent appraiser considers various factors such as the cost of producing the systems, the estimated price that could be obtained in the market from the sale of the systems, and the present value of the economic benefits expected to be generated by the systems. We then present our appraised fair market value to the U.S. Treasury Department when we apply for grants on our solar energy systems. In a number of cases, the U.S. Treasury Department has determined that grants should be paid based on a lower value for the systems and has in such instances posted guideline system values on its website that should be used in the grant applications.

We initially record the grants receivable for leased solar energy systems as deferred income at the amounts that have been approved for payment by the U.S. Treasury Department and then amortize them on a straight-line basis over the estimated useful lives of the related solar energy systems. We record the amortization of the deferred income as a credit to depreciation expense in the consolidated statement of operations. We record a catch up adjustment in the period in which the grant is approved to recognize the portion of the grant that matches proportionally the amortization for the

 

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period between the date of placement in service of the solar energy systems and approval by the U.S. Treasury Department or receipt by the investor of the associated grant, in the case of lease pass-through investment funds. The catch up adjustments we have recorded to date have been immaterial. Some of our investment fund agreements obligate us to reimburse the fund investors based upon the difference between their anticipated benefit from U.S. Treasury grants at the formation of the funds and the benefit they receive from the amounts paid by the U.S. Treasury Department. For the joint venture investment funds where we are contractually obligated to reimburse investors for reductions in anticipated grants receivable, we record amounts we expect to pay the investors as distributions payable to noncontrolling interests in the consolidated balance sheet, and any impact to the consolidated statement of operations, which is determined using the HLBV method, is reflected in the net income or loss attributable to noncontrolling interests line item. For sale-leaseback investment funds where we are contractually obligated to reimburse investors for reductions in anticipated grants receivable, we record amounts we expect to pay the investors under accrued and other current liabilities and reduce the deferred gain on sale-leaseback transactions included within other liabilities in the consolidated balance sheet, with no impact to the consolidated statement of operations. For lease pass-through investment funds, all amounts received from the investors are recorded in the consolidated balance sheet as a lease pass-through financing obligation and the amounts we expect to reimburse investors for reductions in anticipated grants receivable would reduce the lease pass-through obligation with no impact on the consolidated statement of operations.

In the fourth quarter of 2011, we had discussions with representatives of the U.S. Treasury Department relating to U.S. Treasury grant applications for certain commercial solar energy systems submitted in the third and fourth quarters of 2011 and the appropriate U.S. Treasury grant valuation guidelines for such systems. We were unsuccessful in our attempts to have the U.S. Treasury Department reconsider its valuation for these systems, and while we maintained the accuracy of the contracted value to the investment fund, we elected at that time to receive the lower amounts communicated by the U.S. Treasury Department. As a result, the U.S. Treasury Department awarded grants in amounts lower than the appraised fair market values for these systems. We have appropriately reflected the financial impact of the anticipated reduction in our consolidated financial statements as of December 31, 2011.

We received no grants prior to 2010. The changes in deferred U.S. Treasury Department grant proceeds for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2012 were as follows:

 

(In thousands)       

U.S. Treasury grant receipts during the year ended December 31, 2010

   $ 20,084   

Amortization during the year ended December 31, 2010

     (744
  

 

 

 

Balance as of December 31, 2010

     19,340   

U.S. Treasury grant receipts and receivable during the year ended December 31, 2011

     68,585   

U.S. Treasury grants receipts and receivable by investors under lease pass-through investment funds

     54,730   

Amortization during the year ended December 31, 2011

     (5,221
  

 

 

 

Balance as of December 31, 2011

     137,434   

U.S. Treasury grant receipts and receivable during the nine months ended September 30, 2012

     96,844   

U.S. Treasury grants receipts and receivable by investors under lease pass-through investment funds

     46,475   

Amortization during the nine months ended September 30, 2012

     (7,405
  

 

 

 

Balance as of September 30, 2012

   $ 273,348   
  

 

 

 

 

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Stock-Based Compensation

We account for stock-based compensation costs under the provisions of FASB ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all share-based payments granted to employees, including our executive officers and employee members of our board of directors, based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or canceled during the periods reported.

We apply ASC 718 and FASB ASC Subtopic 505-50, Equity-Based Payments to Non Employees, to options and other stock-based awards issued to non-employees. In accordance with ASC 718 and ASC Subtopic 505-50, we use the Black-Scholes option-pricing model to measure the fair value of the options at the measurement date and each reporting period prior to that, as applicable.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends that are estimated as follows:

 

  Ÿ  

Fair value of our common stock.    Because our stock is not publicly traded, we must estimate the common stock’s fair value, as discussed in “Common Stock Valuations” below.

 

  Ÿ  

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. We will continue to utilize the simplified method for all standard awards until we have established a reasonable period of representative trading history as a public company, at which time we will determine the expected term based on the historical option exercise behavior of our employees, expectations about future option exercise behavior and post-vesting cancellations.

 

  Ÿ  

Volatility.    Because there is no trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the solar energy industry similar in size, stage of life cycle and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us. If this occurs, more suitable companies whose share prices are publicly available would be utilized in the calculation. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense determined on the grant date.

 

  Ÿ  

Risk-free rate.    The risk-free interest rate is based on the yields of U.S. Treasury Department securities with maturities similar to the expected term of the options for each option group.

 

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  Ÿ  

Dividend yield.    We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures since the adoption of our option plan. We routinely evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and expectations of future option exercise behavior. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense as it relates to the future grants of our stock-based awards.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
         2009             2010             2011             2011             2012      
                       (unaudited)  

Expected term (in years)

     6.10       5.98        6.09        6.09        6.16   

Volatility

     97.82     88.49     87.26     87.00     88.16

Risk-free interest rate

     2.44     2.50     1.95     2.17     1.08

Dividend yield

                                   

Stock-based compensation totaled $0.9 million, $1.8 million, $5.1 million, $3.2 million and $7.7 million, respectively, in 2009, 2010, and 2011 and the nine months ended September 30, 2011 and 2012. As of December 31, 2011 and September 30, 2012, we had $24.7 million and $30.7 million, respectively, of unrecognized compensation expense, which will be recognized over the weighted average remaining vesting period of 3.01 years and 2.74 years, respectively.

Common Stock Valuations

Our board of directors determined the fair value of the common stock underlying our stock options. The board of directors intended the granted options to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on each grant date. The common stock valuations were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations combined with management judgment. Our board of directors is comprised of a majority of non-employee directors that we believe have the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. In the absence of a public trading market for our common stock, our board of directors, with input from management, exercised

 

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significant judgment and considered numerous objective and subjective factors to determine the common stock’s fair value as of the date of each option grant, including the following factors:

 

  Ÿ  

concurrent valuations performed by an unrelated third-party valuation expert, as described in the chart below;

 

  Ÿ  

the prices, rights, preferences and privileges of our preferred stock relative to the common stock;

 

  Ÿ  

the prices of our preferred stock sold to outside investors in arm’s-length transactions;

 

  Ÿ  

our operating and financial performance;

 

  Ÿ  

current business conditions and projections;

 

  Ÿ  

the market performance of comparable publicly traded companies;

 

  Ÿ  

our history and the introduction of new products and services;

 

  Ÿ  

our stage of development;

 

  Ÿ  

the hiring of key personnel;

 

  Ÿ  

the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of the company, given prevailing market conditions;

 

  Ÿ  

any adjustment necessary to recognize a lack of marketability for our common stock;

 

  Ÿ  

individual sales of our common stock; and

 

  Ÿ  

the U.S. and global capital market conditions.

Estimates obtained from third-party valuation experts of the fair value of our common stock are set forth below as of the indicated dates:

 

Report Date

   Effective as of    Third Party
Estimate of Fair
Value Per
Common Share
 

December 7, 2010

   December 3, 2010    $ 3.40   

May 24, 2011

   May 12, 2011      5.07   

August 9, 2011

   August 1, 2011      5.88   

September 27, 2011

   September 14, 2011      5.92   

November 1, 2011

   October 25, 2011      5.98   

February 6, 2012

   January 31, 2012      10.74   

March 22, 2012

   March 12, 2012      10.93   

May 21, 2012

   May 14, 2012      11.38   

August 14, 2012

   August 9, 2012      12.20   

September 11, 2012

   September 6, 2012      18.48   

 

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We granted stock options with the following exercise prices between January 1, 2011 and November 27, 2012:

 

Option Grant Dates

   Number of Shares
Underlying
Options
     Exercise Price
Per Share
     Common Stock Fair
Value Per Share at
Grant Date
 

January 10, 2011

     531,158       $ 3.40       $ 3.40   

February 16, 2011

     884,620         3.40         3.40   

May 25, 2011

     3,121,058         5.07         5.07   

August 10, 2011

     455,978         5.88         5.88   

October 24, 2011

     1,480,724         5.92         5.92   

November 2, 2011

     97,500         5.98         5.98   

December 5, 2011

     472,100         5.98         5.98   

February 8, 2012

     987,880         10.74         10.74   

March 27, 2012

     292,000         10.93         10.93   

April 25, 2012

     223,400         10.93         10.93   

May 22, 2012

     466,150         11.40         11.40   

June 11, 2012

     105,381         11.40         11.40   

July 19, 2012

     189,817         11.40         11.40   

August 15, 2012

     101,679         12.20         12.20   

September 12, 2012

     151,612         18.48         18.48   

September 17, 2012

     50,000         18.48         18.48   

On September 17, 2012, we also granted 16,991 restricted stock units.

Based upon an assumed initial public offering price of $14.00 per share, the mid-point of the price range on the cover of this prospectus, the aggregate intrinsic value of options outstanding as of September 30, 2012 was $137.1 million, of which $76.0 million related to vested options and $61.1 million related to unvested options.

To determine the fair value of our common stock underlying option grants, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (preferred stock, common stock, warrants and options). Our BEV was measured using a combination of financial and market-based methodologies including the following approaches: (i) the market transaction method, or MTM, (ii) the guideline public company method, or GPCM, or (iii) the income approach using the discounted cash flow method, or DCF. The MTM applies an option pricing model to negotiated enterprise valuations of arm’s-length actual transactions in our capital stock with third-party investors. This usually represents the best estimate of fair value. The GPCM considers multiples of financial metrics based on trading multiples of a selected peer group of publicly-traded companies. These multiples are then applied to our financial metrics to derive the indicated values. The DCF method estimates enterprise value based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period. The estimated present value is calculated using a discount rate known as the weighted average cost of capital which accounts for the time value of money and the appropriate degree of risks inherent in the business. Once calculated, BEV is then weighted based on a qualitative assessment of the relative reliability of each method and the weight that an independent market participant could be expected to place on each indication. In allocating the total equity value between preferred and common stock, preferred stock was assumed to convert at the point where conversion provided an economic benefit to the stockholder or was required per the terms of the applicable agreements. Our BEV at each valuation date was allocated to the shares of preferred stock, common stock, warrants and options, using an option pricing method. The option pricing method, or OPM, treats common stock, convertible redeemable preferred stock and convertible preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock has value only if the funds available for

 

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distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative. Estimates of the volatility of our common stock were based on available information on the volatility of common stock of comparable, publicly traded companies.

We believe that the changes in the fair value of our common stock in the periods discussed below were largely driven by achievements in our operational plans, increases in negotiated valuations in arm’s length transactions in our capital securities and improvements in the U.S. economy and the financial and stock markets. Significant factors considered by our board of directors in determining the fair value of our common stock at these grant dates include:

January 2011 and February 2011

Between December 2010 and February 2011, the U.S. economy and the financial and stock markets continued to improve. In December 2010, a strategic investor sold all shares of Series D preferred stock held by it to other investors in an arm’s-length transaction at a per share purchase price of $5.95. This transaction was considered a reliable market price as it was well bargained for and involved a knowledgeable seller and knowledgeable buyers with clearly opposing economic interests. We performed a contemporaneous valuation of our common stock as of December 3, 2010 which determined the fair value to be $3.40 per share as of such date. The valuation determined a BEV by using the MTM weighted at 100% based on a secondary Series D preferred stock transaction as the best indication of value. To corroborate the BEV, the valuation also considered the GPCM and the DCF method. The fair value reflects a non-marketability discount of 30%, which was allocated to the common stock on a noncontrolling interest basis, based on a liquidity event expected to occur within approximately one and one-half years. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $3.40 per share.

May 2011

We performed a contemporaneous valuation of our common stock as of May 12, 2011 which determined the fair value to be $5.07 per share as of such date. The valuation determined a BEV by using the MTM weighted at 100% based on the then-anticipated terms of our Series F preferred stock financing, which included issuing 2,067,186 shares of our Series F preferred stock at a price of $9.68 per share and warrants to purchase 206,716 shares of our Series F preferred stock with an exercise price of $9.68 per share, as the best indication of value. To corroborate the BEV, the valuation also considered the GPCM. The fair value reflects a non-marketability discount of 20%, which was allocated to the common stock on a noncontrolling interest basis, based on a liquidity event expected to occur within approximately 17 months. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $5.07 per share.

August 2011

In June and July 2011, we completed the issuance and sale of 2,067,186 shares of our Series F preferred stock at a price of $9.68 per share and in June 2011, we issued warrants exercisable for 206,716 shares of our Series F preferred stock with an exercise price of $9.68 per share. In June 2011, we announced the creation of a $158 million fund with U.S. Bancorp and a $280 million fund with Google Inc.; and in July 2011, we announced our agreement to install solar energy systems for Hickam

 

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Communities at Joint Base Pearl Harbor-Hickam. Between May 2011 and August 2011, the U.S. economy and the financial and stock markets continued to improve overall, despite a brief decline in the financial and stock markets commencing in August 2011. We performed a contemporaneous valuation of our common stock as of August 1, 2011 which determined the fair value to be $5.88 per share as of such date. The valuation determined a BEV by using the MTM weighted at 100% based on our Series F preferred stock financing as the best indication of value. To corroborate the BEV, the valuation also considered the GPCM. The fair value reflects a non-marketability discount of 20%, which was allocated to the common stock on a noncontrolling interest basis, based on a liquidity event expected to occur within approximately 14 months. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $5.88 per share.

October 2011

In September 2011, we announced the offer of a conditional commitment for a partial guarantee of a $344 million Department of Energy loan to help secure financing for our SolarStrong project to install, own and operate up to 160,000 rooftop solar installations on as many as 124 military housing developments across 33 states. Between August 2011 and October 2011, the U.S. economy and the financial and stock markets continued to stall, precipitated by continued political gridlock on economic issues. Notably, two U.S. solar energy companies, Evergreen Solar, Inc. and Solyndra, Inc., filed for bankruptcy during this period. We performed a contemporaneous valuation of our common stock as of September 14, 2011 which determined the fair value to be $5.92 per share as of such date. The valuation determined a BEV by using the GPCM weighted at 90% and the DCF method weighted at 10%. The fair value reflects a non-marketability discount of 20%, which was allocated to the common stock on a noncontrolling interest basis, based on a liquidity event expected to occur within approximately 12 months. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $5.92 per share.

November 2011 and December 2011

In November 2011, we announced our agreement with Bank of America, N.A. to provide us with a $350 million credit facility to facilitate our SolarStrong project. Between September 2011 and December 2011, the U.S. economy and the financial and stock markets improved and the financial and stock markets exited the brief decline that commenced in August 2011. We performed a contemporaneous valuation of our common stock as of October 25, 2011 which determined the fair value to be $5.98 per share as of such date. The valuation determined a BEV by using the GPCM weighted at 90% and the DCF method weighted at 10%. The fair value reflects a non-marketability discount of 20%, which was allocated to the common stock on a noncontrolling interest basis, based on a liquidity event expected to occur within approximately 14 months. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $5.98 per share.

February 2012

We performed a contemporaneous valuation of our common stock as of January 31, 2012 which determined the fair value to be $10.74 per share as of such date. We were engaged in advanced negotiations with investors for our Series G preferred stock financing during this period, at an expected valuation that represented a significant increase over our prior Series F preferred stock financing. The valuation determined a BEV by using the Probability-Weighted Expected Return, or PWER, variation of the MTM based on the then-anticipated terms and price of our Series G preferred stock financing as the best indication of value. To corroborate the BEV, the valuation also considered the probability-weighted present value of a range of initial public offering outcomes and liquidity scenarios. We used this methodology given that our internal preparation for an initial public offering was underway at this time. The fair value reflects a non-marketability discount of 15%, which was allocated to the common

 

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stock on a noncontrolling interest basis, based on liquidity events occurring over a variety of time periods. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $10.74 per share.

March 2012 and April 2012

In February 2012 and March 2012, as previously anticipated, we completed the issuance and sale of 3,386,986 shares of our Series G preferred stock at a price of $23.92 per share. Although each share of Series G preferred stock is currently convertible into one share of common stock, upon the closing of this offering, each share of Series G preferred stock will automatically convert into a number of shares of common stock equal to the quotient obtained by dividing $23.92 by 60% of the initial public offering price, subject to a specified maximum and minimum adjustment. Therefore, although the nominal value of Series G preferred stock was $23.92 per share, the effective value of such shares on an as-converted to common stock basis may be less than $23.92 per share. In March 2012, we announced our agreement with Rabobank to provide us with $42.5 million in structured financing to fund commercial solar projects in California. Between February 2012 and March 2012, the U.S. economy and the financial and stock markets continued to improve. We performed a contemporaneous valuation of our common stock as of March 12, 2012 which determined the fair value to be $10.93 per share as of such date. The valuation determined a BEV by using the PWER method variation of the MTM based on the probability-weighted present value of a range of initial public offering outcomes and liquidity scenarios. The fair value reflects a non-marketability discount of 15%, which was allocated to the common stock on a noncontrolling interest basis, based on liquidity events occurring over a variety of time periods. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $10.93 per share.

May 2012 through July 2012

In April 2012, we announced our plan to conduct a registered initial public offering of our common stock and the confidential submission to the SEC of our draft registration statement. Between April 2012 and July 2012, the U.S. financial and stock markets stalled, precipitated by global economic issues. We performed a contemporaneous valuation of our common stock as of May 14, 2012 which determined the fair value to be $11.38 per share as of such date. The valuation determined a BEV by using the PWER method variation of the MTM based on the probability-weighted present value of a range of initial public offering outcomes and liquidity scenarios. The fair value reflects a non- marketability discount of 15%, which was allocated to the common stock on a noncontrolling interest basis, based on liquidity events occurring over a variety of time periods. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $11.40 per share.

August 2012

Between July 2012 and August 2012, the U.S. economy was stable and the financial and stock markets improved following the brief decline that commenced in May 2012. We also continued to close additional significant investment funds with new and existing fund investors during this period to support our continued growth. We performed a contemporaneous valuation of our common stock as of August 9, 2012 which determined the fair value to be $12.20 per share as of such date. The valuation determined a BEV by using the PWER method variation of the MTM based on the probability-weighted present value of a range of initial public offering outcomes and liquidity scenarios. The fair value reflects a nonmarketability discount of 13%, which was allocated to the common stock on a noncontrolling interest basis, based on liquidity events occurring over a variety of time periods. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $12.20 per share.

 

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September 2012

Between August 2012 and September 2012, the U.S. economy was stable and the financial and stock markets improved. During this period, we continued to make significant progress in our preparation for a potential initial public offering, and we also closed a $75.0 million working capital facility to support our continued growth. We performed a contemporaneous valuation of our common stock as of September 6, 2012, which determined the fair value to be $18.48 per share as of such date. The valuation determined a BEV by using the PWER method variation of the MTM based on the probability-weighted present value of a range of initial public offering outcomes and liquidity scenarios. The fair value reflects a nonmarketability discount of 10%, which was allocated to the common stock on a noncontrolling interest basis, based on liquidity events occurring over a variety of time periods. Based on this valuation and other factors, our board of directors granted stock options with an exercise price of $18.48 per share.

Nonemployee Stock-Based Compensation

We account for stock options issued to nonemployees based on the estimated fair value of the awards using the Black-Scholes option pricing model. The measurement of stock-based compensation is subject to quarterly adjustments as the underlying equity instruments vest and the resulting change in fair value is recognized in our consolidated statement of operations during the period the related services are rendered.

Inventory Reserves for Excess and Obsolescence

Inventories include solar energy system components, including photovoltaic panels, inverters, mounting hardware and miscellaneous electrical components, and work-in-process, including solar energy system components that are partially installed and direct and indirect capitalized installation costs. Historically, we have purchased materials and appliances used in our energy efficiency business as they are needed. Accordingly, inventories related to energy efficiency products and services have not been material. Raw materials and work-in-process are stated at the lower of cost or market.

We evaluate our inventory reserves on a quarterly basis and write down the value of inventories for estimated excess and obsolete inventories based upon assumptions about future demand and market conditions.

Income Taxes

We use the asset and liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The calculation of our tax assets and liabilities involves uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed by applicable accounting principles. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to estimate and measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including changes in facts or circumstances, changes in tax law, effectively settled

 

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issues under audit, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the relevant period.

As of December 31, 2010 and 2011 and September 30, 2012, we had no material uncertain tax positions.

As of December 31, 2010 and 2011, we had deferred tax assets of approximately $67.4 million and $102.7 million, respectively, and deferred tax liabilities of approximately $28.2 million and $53.0 million, respectively. During these periods the company maintained a net deferred tax asset and booked a valuation allowance against the net deferred tax assets.

Deferred tax assets primarily relate to net operating loss carryforwards, accelerated gains for tax purposes and deferred revenue. As of December 31, 2010 and 2011, we had federal net operating loss carryforwards of approximately $81.2 million and $97.0 million, respectively. In addition, we had net operating losses for state income tax purposes of approximately $45.3 million and $39.7 million as of December 31, 2010 and 2011, respectively, which expire at various dates beginning in 2016 if not utilized.

Our valuation allowance increased by approximately $20.2 million for the year ended December 31, 2010 and by approximately $10.5 million for the year ended December 31, 2011. The valuation allowance is determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. As of December 31, 2010 and 2011, based on our history of losses, we continued to provide a valuation allowance against our deferred tax assets, net of the expected income from the reversal of the deferred tax liabilities.

We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. The amount of our valuation allowance could be materially affected should the actual amounts differ from our estimates. Any adjustment to the deferred tax asset valuation allowance would be recorded in the statement of operations in the periods when the adjustment is determined to be required.

We apply any limitations as a result of the Internal Revenue Code, or the Code, Section 382, when determining the amount of net operating loss that is available for future use. Based on this analysis, we have undergone two ownership changes as defined in Section 382 of the Code. The first ownership change occurred on July 7, 2006, and the second ownership change occurred on August 8, 2007. No additional ownership changes have occurred through September 30, 2012.

We have agreements to sell solar energy systems to the investment funds structured as joint ventures. The gain on the sale of the assets has been eliminated in the consolidated financial statements. These transactions are treated as inter-company sales and as such, tax is not recognized on the sale until we no longer benefit from the underlying asset. Because the systems remain within the consolidated group, the tax expense incurred related to these sales is being deferred and amortized over the life of the underlying systems, estimated to be 30 years. As of December 31, 2010 and 2011, we recorded a long-term prepaid tax expense of $1.2 million and $3.3 million net of amortization, respectively.

Noncontrolling Interests

Our noncontrolling interests represent fund investors’ interest in the net assets of certain funding structures, which we consolidate, that we have entered into to finance the costs of solar energy systems under operating leases. We have determined that the provisions in the contractual agreements of the funding arrangements represent substantive profit sharing arrangements. We have further determined that the appropriate methodology for calculating the noncontrolling interests

 

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balances that reflects the substantive profit sharing arrangements is a balance sheet approach using the HLBV method. We therefore determine the noncontrolling interest balance at each balance sheet date using the HLBV method and record it on our consolidated balance sheet as noncontrolling interests in subsidiaries. Under the HLBV method, the amounts reported as noncontrolling interests in the consolidated balance sheet represent the amounts the fund investors would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements of these structures, assuming the net assets of these funding structures were liquidated at recorded amounts determined in accordance with GAAP. The fund investors’ interest in the results of operations of these funding structures is determined as the difference in noncontrolling interests in the consolidated balance sheets at the start and end of each reporting period, after taking into account any capital transactions between the fund and the fund investors. The noncontrolling interests’ balance is reported as a component of equity in the consolidated balance sheets.

Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated.

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
    2009     2010     2011     2011     2012  
    (in thousands, except share and per share data)  

Consolidated statement of operations data:

     

Revenue:

         

Operating leases

  $ 3,212      $ 9,684      $ 23,145      $ 16,103      $ 33,584   

Solar energy systems sales

    29,435        22,744        36,406        22,706        69,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    32,647        32,428        59,551        38,809        103,389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

         

Operating leases

    1,911        3,191        5,718        3,289        8,615   

Solar energy systems

    28,971        26,953        41,418        31,415        57,924   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    30,882        30,144        47,136        34,704        66,539   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,765        2,284        12,415        4,105        36,850   

Operating expenses:

         

Sales and marketing

    10,914        22,404        42,004        27,246        49,976   

General and administrative

    10,855        19,227        31,664        24,126        31,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    21,769        41,631        73,668        51,372        81,880   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (20,004     (39,347     (61,253     (47,267     (45,030

Interest expense, net

    334        4,901        9,272        7,516        14,922   

Other expenses, net

    2,360        2,761        3,097        1,884        17,895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (22,698     (47,009     (73,622     (56,667     (77,847

Income tax provision

    (22     (65     (92     (62     (107
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (22,720     (47,074     (73,714     (56,729     (77,954

Net income (loss) attributable to noncontrolling interests

    3,507        (8,457     (117,230     (86,172     (16,806
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to stockholders

  $ (26,227   $ (38,617   $ 43,516      $ 29,443      $ (61,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

         

Basic

  $ (3.13   $ (4.50   $ 0.82      $ 0.58      $ (5.63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (3.13   $ (4.50   $ 0.76      $ 0.53      $ (5.63
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

         

Basic

    8,378,590        8,583,772        9,977,646        9,845,324        10,867,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    8,378,590        8,583,772        14,523,734        14,144,765        10,867,584   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Nine Months Ended September 30, 2011 and 2012

Revenue

 

     Nine Months Ended
September 30,
     Change  
(Dollars in thousands)        2011              2012          $      %  

Operating leases

   $ 16,103       $ 33,584       $ 17,481         109

Solar energy systems sales

     22,706         69,805         47,099         207
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 38,809       $ 103,389       $ 64,580         166

Total revenue increased by approximately $64.6 million, or 166%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.

Operating leases revenue increased by approximately $17.5 million, or 109%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The increase is attributable to an increased number of solar energy systems under leases and power purchase agreements that are in service, which increased by 132% from September 30, 2011 to September 30, 2012. This significant growth was attributable to our continued success in the installation of solar energy systems under lease and power purchase agreements in new and existing markets and the more rapid deployment of solar energy systems under these agreements. Operating leases revenue for the nine months ended September 30, 2012 included $13.5 million in revenue attributable to rebates and incentives, representing an increase of $6.0 million compared to the nine months ended September 30, 2011.

Revenue from sale of solar energy systems increased by approximately $47.1 million, or 207%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. This increase was primarily due to a $13.3 million increase in large commercial solar energy system sales, a $15.0 million increase in revenue from long-term solar energy system sales contracts, an $8.9 million increase in revenue from sales of solar energy systems to the government and $9.2 million in revenue from sales to a specific customer during the nine months ended September 30, 2012. In addition, revenue from the sale of energy efficiency products and services increased by $3.7 million during this period. This increase in revenue was offset in part by a lower average sales price of solar energy systems sold for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The decline in the average sales price was due to a decrease in the cost of the solar energy system components that in turn led to a downward impact on the competitive market price of solar energy systems sold. We expect that the continuing decline in the cost of solar energy system components will similarly impact our average sales price.

Cost of Revenue, Gross Profit and Gross Profit Margin

 

     Nine Months Ended
September 30,
    Change  
(Dollars in thousands)        2011             2012         $      %  

Operating leases

   $ 3,289      $ 8,615      $ 5,326         162

Gross profit of operating leases

     12,814        24,969        12,155         95

Gross profit margin of operating lease revenue

     80     74     

Solar energy systems

   $ 31,415      $ 57,924      $ 26,509         84

Gross (loss) profit of solar energy systems

     (8,709     11,881        20,590         236

Gross (loss) profit margin of solar energy systems

     (38 )%      17     

Total cost of revenue

   $ 34,704      $ 66,539      $ 31,835         92

Total gross profit

     4,105        36,850        32,745         798

Total gross profit margin

     11     36     

 

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Cost of operating lease revenue increased by approximately $5.3 million, or 162%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. This increase was primarily due to an increase in the aggregate number of solar energy systems placed under operating leases that were interconnected in the nine months ended September 30, 2012, offset in part by declining costs of solar energy system components.

Cost of sales of solar energy systems increased by approximately $26.5 million, or 84%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. This increase was due to increased costs associated with the rise in solar energy system sales. The increase in the gross margin from a gross loss of 38% to a gross profit of 17% was primarily due to the increase in the volume of sales recognized for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Due to increased volume, we were able to allocate overhead to more units, leading to a lower cost per unit.

The cost of our component materials could increase as a result of the U.S. government imposition of tariffs on solar cells manufactured in China. Based on determinations by the U.S. government, the applicable anti-dumping tariff rates range from approximately 8%-239%. To the extent that U.S. market participants experience harm from Chinese pricing practices, an additional tariff of approximately 15%-16% will be applied. Because we currently purchase solar panels containing cells manufactured outside of China, we currently are not adversely impacted by the tariffs. We believe there is adequate surplus capacity of non-tariff panels available. In addition, we expect the cost of solar panels to continue to decline, although we expect the rate of decline will decrease as component prices approach the cost of manufacture.

Operating Expenses

 

     Nine Months Ended
September 30,
     Change  
(Dollars in thousands)        2011              2012          $      %  

Sales and marketing expense

   $ 27,246       $ 49,976       $ 22,730         83

General and administrative expense

     24,126         31,904         7,778         32
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 51,372       $ 81,880       $ 30,508         59

Sales and marketing expenses increased by approximately $22.7 million, or 83%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. This increase was driven primarily by greater marketing and promotional activities in the nine months ended September 30, 2012 as we continued to broaden our marketing efforts and sales in new and existing sales territories. The expenditure on promotional marketing costs increased by $4.6 million from $15.6 million to $20.2 million for the nine months ended September 30, 2011 and September 30, 2012, respectively. In line with the broader sales and marketing efforts, we increased our total number of personnel allocated to sales and marketing expense from 267 as of September 30, 2011 to 641 as of September 30, 2012. As a result of this growth in headcount, payroll costs increased by $15.8 million from $11.9 million to $27.7 million for the nine months ended September 30, 2011 and September 30, 2012, respectively.

General and administrative expenses increased by approximately $7.8 million, or 32%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The increase in general and administrative expenses was due primarily to an increase in the number of our personnel allocated to general and administrative expense from 128 as of September 30, 2011 to 249 as of September 30, 2012. As a result of this growth in headcount, payroll costs increased by $5.8 million from $8.9 million to $14.7 million for the nine months ended September 30, 2011 and September 30, 2012, respectively. The administrative overhead costs associated with a larger number

 

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of investment funds and their associated legal and professional fees increased by $1.0 million from the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2012.

Other Income and Expenses

 

     Nine Months Ended
September 30,
     Change  
(Dollars in thousands)        2011              2012          $      %  

Interest expense, net

   $ 7,516       $ 14,922       $ 7,406         99

Other expense, net

     1,884         17,895         16,011         850
  

 

 

    

 

 

    

 

 

    

Total interest and all other expenses, net

   $ 9,400       $ 32,817       $ 23,417         249

Interest expense, net, increased by approximately $7.4 million, or 99%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Interest expense comprises imputed interest on financing obligations and interest expense on bank borrowings, net of interest income on cash balances. This increase is in line with higher balances of financing obligations and outstanding balance of bank debt in the first nine months of 2012 compared to the same period in 2011.

Other expenses, net, increased by approximately $16.0 million, or 850%, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. This increase was primarily due to a non-cash charge related to a change in the fair value of the convertible redeemable preferred stock warrants.

Provision for Income Taxes

 

     Nine Months
Ended
September 30,
     Change  
(Dollars in thousands)        2011              2012          $      %  

Income tax expense

   $ 62       $ 107       $ 45         73

Income tax expense increased by approximately $0.01 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. As of September 30, 2012, we had incurred a total of $3.8 million of income tax expense in connection with sales of solar energy systems to the investment funds. Because no gain on the sale of the solar energy systems was recognized in our consolidated financial statements, the tax expense was deferred and is being recognized as tax expense over the estimated useful life of the solar energy systems.

Net Income (Loss) Attributable to Noncontrolling Interests

 

     Nine Months Ended
September  30,
    Change  
(Dollars in thousands)    2011     2012     $     %  

Net loss attributable to noncontrolling interests

   $ (86,172   $ (16,806   $ (69,366     80

The income or loss attributable to noncontrolling interests represents the share of income or loss that is allocated to the investors in the joint venture investment funds. This amount is determined as the change in the investors’ interest in the joint venture investment funds between the balance sheet dates at the beginning and end of each reporting period calculated using the HLBV method, less any capital contributions net of any capital distributions. The calculation of the noncontrolling interest balance using the HLBV method depends on the specific contractual liquidation provisions in each of the joint venture funds and is generally affected by, among other factors, the tax attributes allocated to

 

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the investors including tax bonus depreciation and income tax credits or U.S. Treasury grants in lieu of the investment tax credits, the existence of guarantees of minimum returns to the fund investors by us, and the contractual provisions relating to the allocation of tax income or losses in these funds including provisions that govern the level of deficits that can be funded by noncontrolling interests in a liquidation scenario. The calculation is also affected by the cost of the assets sold to the funds which forms the book basis of the net assets allocated to the investors assuming a liquidation scenario. Generally, significant loss allocations to the noncontrolling interests have arisen in situations where there is a significant difference between the fair value and the cost of assets sold to the funds in a particular period accompanied by the absence of guarantees of minimum returns to the investors, since the capital contributions by the noncontrolling interests are based on the fair values of the assets in a fund while the calculation of the noncontrolling interests balance at each reporting period is determined based on the cost of the assets in the fund. The existence of guarantees of minimum returns to the investors and the amounts of deficit that an investor is contractually obligated to fund in a liquidation scenario reduce the amount of losses that are allocated to the noncontrolling interests.

The net loss attributable to noncontrolling interests of $16.8 million reported in the nine months ended September 30, 2012 is attributable to a decrease in the noncontrolling interest’s balance between December 31, 2011 and September 30, 2012 of $88.5 million netted against the excess of distributions over capital contributions of $71.7 million.

The net loss attributable to noncontrolling interests of $86.2 million reported in the nine months ended September 30, 2011 is attributable to a increase in the noncontrolling interest’s balance between December 31, 2010 and September 30, 2011 of $19.7 million less capital contributions net of distributions of $105.9 million.

The net loss allocation to noncontrolling interests was lower in the nine months ended September 30, 2012 compared to the comparative period in 2011 mainly due to an approximately $44.9 million higher loss allocation in 2011 to an investor in a fund into which we had sold assets with a larger excess of fair value over cost in 2011 compared to 2012, and an approximately $9.2 million higher loss allocation in 2011 to an investor in two funds into which we had contributed assets, while we did not contribute any assets into these funds in 2012. Additionally, we recorded $17.8 million higher loss allocation to noncontrolling interests in an investment fund which was formed in the second quarter of 2011 and for which the investor had contributed $30.9 million in the nine months ended September 30, 2011 compared to $21.5 million in the nine months ended September 30, 2012. In this investment fund, the investor contributions are received after we contribute solar energy systems into the fund. As a result, the loss allocations occur as we receive the contributions.

Years Ended December 31, 2009, 2010 and 2011

Revenue

 

     Year Ended December 31,      Change 2010 vs. 2009     Change 2011 vs. 2010  
(Dollars in thousands)    2009      2010      2011            $                 %                 $                  %        

Operating leases

   $ 3,212       $ 9,684       $ 23,145       $ 6,472        201   $ 13,461         139

Solar energy systems

     29,435         22,744         36,406         (6,691     (23 )%      13,662         60
  

 

 

    

 

 

    

 

 

    

 

 

     

 

 

    

Total revenue

   $ 32,647       $ 32,428       $ 59,551       $ (219     (1 )%    $ 27,123         84

2011 Compared to 2010

Total revenue increased by approximately $27.1 million, or 84%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010.

 

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Operating leases revenue increased by approximately $13.5 million, or 139%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase is attributable to an increased number of solar energy systems under leases and power purchase agreements in service and generating revenue. The number of solar energy systems under leases and power purchase agreements increased by 135% during the year ended December 31, 2011 compared to the prior year. This significant growth was attributable to our continued success in the installation of solar energy systems under lease and power purchase agreements in new and existing markets and the more rapid deployment of solar energy systems under these agreements. There was no significant change in the pricing of the leases or power purchase agreements in 2011 compared to 2010. Additionally, during the year ended December 31, 2011, we expanded our operations into new territories such as the East Coast and continued our sales penetration within existing territories. Operating leases revenue for the year ended December 31, 2011 included $9.6 million in revenue attributable to rebates and incentives, representing an increase of $5.8 million compared to the year ended December 31, 2010.

Revenue from sale of solar energy systems increased by approximately $13.7 million, or 60%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This increase was primarily due to a $14.7 million increase in large commercial solar energy system sales compared to the prior year. This increase in revenue was offset in part by lower average selling prices of solar energy systems sold in the year 2011. The decline in the average sales price was due to a decrease in the cost of the solar energy system components that in turn led to a downward impact on the competitive market price of solar energy systems sold.

2010 Compared to 2009

Total revenue decreased by approximately $0.2 million, or 1%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009.

Operating lease revenue increased by approximately $6.5 million, or 201%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. This increase is attributable to an increased number of solar energy systems under operating leases in 2010 compared to 2009. The number of solar energy systems under leases and power purchase agreements increased by 130% during the year ended December 31, 2010 compared to the prior year. This significant growth was attributable to our continued success in the installation of solar energy systems under lease and power purchase agreements in new and existing markets and the more rapid deployment of solar energy systems under these agreements. There was no significant change in the pricing of the leases or power purchase agreements in 2010 compared to 2009. During 2010, we expanded into new states such as Texas and also implemented an additional four investment funds for financing the cost of solar energy systems that were then placed into operating leases. This was in addition to seven existing investment funds that we implemented in 2008 and 2009. Operating leases revenue for the year ended December 31, 2010 included $3.8 million in revenue attributable to rebates and incentives, representing an increase of $2.7 million compared to the year ended December 31, 2009.

Revenue from sale of solar energy systems decreased by approximately $6.7 million, or 23%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Direct sales to cash paying customers declined in 2010 as we focused more on power purchase agreements and leasing of solar energy systems through investment fund arrangements.

 

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Cost of Revenue, Gross Profit and Gross Profit Margin

 

    Year Ended December 31,     Change 2010 vs. 2009     Change 2011 vs. 2010  
(Dollars in thousands)   2009     2010     2011           $                 %                 $                 %        

Operating leases

  $ 1,911      $ 3,191      $ 5,718      $ 1,280        67   $ 2,527        79

Gross profit of operating leases

    1,301        6,493        17,427        5,192        399     10,934        168

Gross profit margin of operating lease revenue

    41     67     75        

Solar energy systems

  $ 28,971      $ 26,953      $ 41,418      $ (2,018     (7 )%    $ 14,465        54

Gross (loss) profit of solar energy systems

    464        (4,209     (5,012     (4,673     (1,007 )%      (803     (19 )% 

Gross (loss) profit margin of solar energy systems

    2     (19 )%      (14 )%         

Total cost of revenue

  $ 30,882      $ 30,144      $ 47,136      $ (738     (2 )%    $ 16,992        56

Total gross profit

    1,765        2,284        12,415        519        29     10,131        444

Total gross profit margin

    5     7     21        

2011 Compared to 2010

Cost of operating lease revenue increased by $2.5 million, or 79%, in the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase was primarily due to the increase in the aggregate number of solar energy systems placed under operating leases that were interconnected in the year ended December 31, 2011, offset in part by declining costs of solar energy system components.

Cost of sales of solar energy systems increased by approximately $14.5 million, or 54%, in the year ended December 31, 2011 as compared to the year ended December 31, 2010. The change was due to rising costs associated with the increase in commercial solar energy system sales in 2011 and an increase in the aggregate amount of operational overhead costs allocated to these systems attributable to the growth in operational costs that we incurred to support our growth in current and new territories. These overhead costs increased by $15.7 million from $18.3 million in 2010 to $34.0 million in 2011. While we expect these allocated overhead costs to increase in the future, we expect the installation volume to increase at a greater rate than the increase in the overhead costs. Accordingly, the allocated overhead cost per installed system is expected to decrease in the future. The increase was also due to a $2.6 million charge recorded in the year ended December 31, 2011 to adjust the cost of certain raw material inventory to market value and a $0.1 million charge for slow moving inventory.

2010 Compared to 2009

Cost of operating lease revenue increased by $1.3 million, or 67%, in the year ended December 31, 2010 as compared to the year ended December 31, 2009. The increase in this cost is primarily due to the increased number of solar energy systems placed under operating leases that were interconnected in the period, offset in part by declining costs of solar energy systems components. As of December 31, 2010, we had eleven investment funds compared to seven investment funds as of December 31, 2009.

Cost of sales of solar energy system decreased by approximately $2.0 million, or 7%, in the year ended December 31, 2010 as compared to the year ended December 31, 2009. The decrease was due to lower volumes of solar energy system sales and declining costs of solar energy systems components.

 

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Operating Expenses

 

    Year Ended December 31,      Change 2010 vs. 2009     Change 2011 vs. 2010  
(Dollars in thousands)   2009      2010      2011              $                    %                 $                  %        

Sales and marketing expense

  $ 10,914       $ 22,404       $ 42,004       $ 11,490         105   $ 19,600         87

General and administrative expense

    10,855         19,227         31,664         8,372         77     12,437         65
 

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total operating expense

  $ 21,769       $ 41,631       $ 73,668       $ 19,862         91   $ 32,037         77

2011 Compared to 2010

Sales and marketing expenses increased by approximately $19.6 million, or 87%, in the year ended December 31, 2011 as compared to the year ended December 31, 2010. This increase was driven primarily by increased marketing activities in 2011 as promotional marketing costs increased by $11.5 million to $23.0 million in 2011 compared to $11.5 million in 2010, as we continued to broaden our marketing efforts to develop our backlog and increase our sales in new and existing sales territories. In line with the broader marketing efforts, we increased the total number of our sales and marketing personnel from 137 as of December 31, 2010 to 319 as of December 31, 2011. The increase in personnel headcount resulted in an increase of $4.2 million in payroll costs that increased from $8.6 million in 2010 to $12.8 million in 2011.

General and administrative expenses increased by approximately $12.4 million, or 65%, in the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in general and administrative expenses was due to an increase in the number of our administrative and management personnel from 102 as of December 31, 2010 to 155 as of December 31, 2011. The increase in personnel headcount resulted in an increase in payroll costs of $4.1 million from $6.9 million in 2010 to $11.0 million in 2011. The increased administrative overhead costs associated with a larger number of investment funds and additional legal and professional fees resulted in an increase of $3.7 million in expenses, which increased from $2.4 million in 2010 to $6.1 million in 2011.

2010 Compared to 2009

Sales and marketing expenses increased by approximately $11.5 million, or 105%, in the year ended December 31, 2010 as compared to the year ended December 31, 2009. This increase was driven primarily by increased marketing activities in 2010 as we intensified our marketing efforts to increase our sales in new and existing sales territories. The expenditure on promotional marketing costs increased by $8.9 million to $11.4 million in 2010 compared to $2.5 million in 2009. In line with the broader marketing efforts, we increased the number of our sales and marketing personnel from 99 as of December 31, 2009 to 137 as of December 31, 2010. The increase in personnel headcount resulted in an increase of $4.0 million in payroll costs which increased from $4.6 million in 2009 to $8.6 million in 2010. In late 2008 and early 2009, as a result of the state of the capital markets, our ability to finance the installation of solar energy systems was limited and resulted in a significant backlog of signed sales orders for solar energy systems. Therefore, in 2009, we reduced our spending on sales and marketing initiatives.

General and administrative expenses increased by approximately $8.4 million, or 77%, in the year ended December 31, 2010 as compared to the year ended December 31, 2009. The increased general and administrative expenses were primarily due to an increase in personnel costs. Personnel costs increased due to an increase in the number of our administrative and management personnel from 53 as of December 31, 2009 to 102 as of December 31, 2010, including the creation and staffing of a funding structures management group to manage the increased number of investment fund

 

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arrangements that we created in 2010. The increase in personnel headcount resulted in an increase in payroll costs of $3.4 million from $3.5 million in 2009 to $6.9 million in 2010. The increased administrative overhead costs associated with a larger number of investment funds and additional legal and professional fees resulted in an increase of $2.3 million in expenses, which increased from $0.1 million in 2009 to $2.4 million in 2010.

Other Income and Expenses

 

     Year Ended December 31,      Change 2010 vs. 2009     Change 2011 vs. 2010  
(Dollars in thousands)    2009      2010      2011            $                  %                 $                  %        

Interest expense, net